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

  • 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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    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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    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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    1. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
    2. Arun Sundararajan, 2003. "Managing Digital Piracy: Pricing, Protection and Welfare," Law and Economics 0307001, EconWPA.
    3. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
    4. Jing, Bing, 2007. "Network externalities and market segmentation in a monopoly," Economics Letters, Elsevier, vol. 95(1), pages 7-13, April.
    5. Kartik Hosanagar & Ramayya Krishnan & John Chuang & Vidyanand Choudhary, 2005. "Pricing and Resource Allocation in Caching Services with Multiple Levels of Quality of Service," Management Science, INFORMS, vol. 51(12), pages 1844-1859, December.
    6. Arun Sundararajan, 2003. "Nonlinear pricing of information goods," Industrial Organization 0307003, EconWPA.
    7. Deneckere, R. & McAfee, R.P., 1995. "Damaged Goods," Working papers 9508, Wisconsin Madison - Social Systems.
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