A competitive analysis of software quality investment with technology diversification and security concern

Once installed by a larger population of consumers, software products become appealing targets for malicious agents and thus consumers’ security concern increases. Software vendors must balance quality investment for demand improvement and resulting security anxiety, particularly when deciding whether to choose diversified or similar technology with competitors. Technology choice becomes challengeable in that choosing similar technologies can increase the degree of technology spillovers, which, on the other hand, leads to more software vulnerabilities that are shared among vendors’ software products. Considering these elements, this paper analyzes two competitive software vendors’ quality investment for heterogeneous markets composed of a high-end market with particular quality requirement and a low-end market. I reveal that whether vendors target the high-end market or the low-end market, they may benefit from the risk of security threat because it may soften their price competition. An increase in the maximal potential of technology spillovers may harm the high-quality vendor even though it benefits the low-quality vendor. The high-quality vendor always benefits from the degree of technology diversification while the low-quality vendor benefits only if the risk of security is rather high. Meanwhile, I find the two competitive vendors may target the high-end market and the low-end market respectively even though they are symmetric. Furthermore, I show that compared with optimal industry market strategies, the vendors seem reluctant to be aggressive. Hence, the widely discussed argument that aggressive market strategies should be inhibited because of the resulting serious security concern is not always logical.