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Research Note--When Is Versioning Optimal for Information Goods?

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Author Info

  • Hemant K. Bhargava

    ()
    (Graduate School of Management, University of California, Davis, Davis, California 95616)

  • Vidyanand Choudhary

    ()
    (The Paul Merage School of Business, University of California, Irvine, Irvine, California 92697)

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    Abstract

    This paper provides insights about when versioning is an optimal strategy for information goods. Our characterization of this class of goods is that variable costs are invariant with quality, including the special case of zero variable costs. Our analysis assumes a monopoly firm that has an existing product in the market and has an opportunity to segment the market by introducing additional lower-quality versions. We derive a simple decision rule for determining the optimality of versioning based on the solution to a single-product maximization problem. Versioning is optimal when the optimal market share of the lower-quality version, offered alone, is greater than the optimal market share of the high-quality version, offered alone. A firm can profitably employ versioning for an information good if it can design the lower quality in a way that, relative to their valuations for the high-end version, high-type consumers have a lower relative valuation for the lower quality than do low-type consumers. When variable costs increase, a firm that offered only one product version need not consider adding another version. When variable costs decrease, the firm should explore adding a lower-quality version.

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    File URL: http://dx.doi.org/10.1287/mnsc.1070.0773
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 54 (2008)
    Issue (Month): 5 (May)
    Pages: 1029-1035

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    Handle: RePEc:inm:ormnsc:v:54:y:2008:i:5:p:1029-1035

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    Web page: http://www.informs.org/
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    Related research

    Keywords: versioning; multiproduct monopoly; vertical differentiation; market segmentation; information goods;

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    Cited by:
    1. Calzada, Joan & Valletti, Tommaso, 2011. "Intertemporal movie distribution: Versioning when customers can buy both versions," CEPR Discussion Papers 8279, C.E.P.R. Discussion Papers.
    2. Daniel Halbheer & Florian Stahl & Oded Koenigsberg & Donald R. Lehmann, 2013. "Digital Content Strategies," Working Papers 329, University of Zurich, Department of Business Administration (IBW).
    3. Sonja Lehmann & Peter Buxmann, 2009. "Pricing Strategies of Software Vendors," Business & Information Systems Engineering, Springer, vol. 1(6), pages 452-462, December.
    4. Joan Calzada & Guillem Ordóñez, 2012. "Competition in the news industry: fighting aggregators with versions and links," Working Papers 12-22, NET Institute.

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