Versioning for information goods with development costs

This study examines information-good versioning strategies for a monopoly firm and is novel in that it endogenizes quality choices with general consumer utility and firm cost. Specifically, consumer utility for good quality is monotonic and concave. The firm first develops the highest quality version at a certain cost and then disables some features to make low-quality versions at no cost. The results reveal that in the case of two user types, if the number of low-type users is small or the additional value they obtain from being served compared with not being served is small, the optimal strategy for the firm is to give them up. If this situation is reversed, it is optimal to serve them. Meanwhile, if their taste for quality is very close to that of high-type users, they should be offered the same quality as the latter. Otherwise, the firm should implement a versioning strategy. Second, with n user types, whether a unique quality is offered to a user type depends on the corresponding benefit–cost analysis. Finally, versioning can never be socially optimal, as the social optimum requires low-type users to purchase the same quality as high-type users. Further, versioning prohibition lowers social welfare if the firm is compelled to stop serving low-type users.