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The Neo-Luddite's Lament: Excessive Upgrades in the Software Industry

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Author Info

  • Glenn Ellison
  • Drew Fudenberg

Abstract

We examine two reasons why a monopoly supplier of software may introduce more upgrades than is socially optimal when the upgrade is backward but not forward compatible, so users who upgrade reduce others' network benefits. One explanation involves a commitment problem: profits and social welfare may suffer because ex post the monopolist will want to sell the upgraded product to new consumers. The second involves consumer heterogeneity. Here oversupply arises from the difference between the externality that upgrades impose on the marginal and average consumer, and from the effect of upgrades on sales of the base good.

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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1870.

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Date of creation: 1999
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Handle: RePEc:fth:harver:1870

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Cited by:
  1. A. Banerji & Bhaskar Dutta, 2004. "Networks, Network Externalities and Market Segmentation," Working papers 124, Centre for Development Economics, Delhi School of Economics.
  2. Steven J. Davis & Jack MacCrisken & Kevin M. Murphy, 2001. "Economic Perspectives on Software Design: PC Operating Systems and Platforms," NBER Working Papers 8411, National Bureau of Economic Research, Inc.
  3. Anton, James J. & Biglaiser, Gary, 2013. "Quality, upgrades and equilibrium in a dynamic monopoly market," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(3), pages 1179-1212.
  4. Robert C. Feenstra & Christopher R. Knittel, 2009. "Re-Assessing the U.S. Quality Adjustment to Computer Prices: The Role of Durability and Changing Software," NBER Chapters, in: Price Index Concepts and Measurement, pages 129-160 National Bureau of Economic Research, Inc.
  5. Jennifer Zhang & Abraham Seidmann, 2006. "Selling and Leasing Software with Network Externality," Working Papers, NET Institute 06-13, NET Institute, revised Aug 2006.
  6. Awrey, Dan, 2013. "Toward a supply-side theory of financial innovation," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 401-419.
  7. Susan N. Houseman & Timothy J. Bartik & Timothy J. Sturgeon, 2014. "Measuring Manufacturing: How the Computer and Semiconductor Industries Affect the Numbers and Perceptions," Upjohn Working Papers and Journal Articles, W.E. Upjohn Institute for Employment Research 14-209, W.E. Upjohn Institute for Employment Research.
  8. Athanasopoulos, Thanos, 2014. "Compatibility, Intellectual Property, Innovation and Efficiency in Durable Goods Markets with Network Effects," The Warwick Economics Research Paper Series (TWERPS) 1043, University of Warwick, Department of Economics.
  9. Liu, Hsin-Hsien, 2013. "How promotional frames affect upgrade intentions," Journal of Economic Psychology, Elsevier, Elsevier, vol. 39(C), pages 237-248.

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