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Software Upgrades under Monopoly

Author

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  • Jiri Strelicky
  • Kresimir Zigic

Abstract

We study price discrimination in a monopolistic software market. The monopolist charges different prices for the upgrade version and for the full version. Consumers are heterogeneous in taste for infinitely durable software and there is no resale. We show that price discrimination leads to a higher software quality but raises both absolute price and price per quality. This price discrimination does not increase sales and it decreases the total number of consumers compared to no discrimination. Finally, such discrimination decreases consumers' surplus but increases the developer's profit and social welfare that attains the social optimum in the limit.

Suggested Citation

  • Jiri Strelicky & Kresimir Zigic, 2013. "Software Upgrades under Monopoly," CERGE-EI Working Papers wp478, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp478
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    File URL: http://www.cerge-ei.cz/pdf/wp/Wp478.pdf
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    References listed on IDEAS

    as
    1. Belleflamme,Paul & Peitz,Martin, 2010. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9780521681599, November.
    2. Qiu_Hong Wang & Kai-Lung Hui, 2005. "Technology Timing and Pricing In the Presence of an Installed Base," Industrial Organization 0512013, EconWPA.
    3. Banerjee, Dyuti S., 2003. "Software piracy: a strategic analysis and policy instruments," International Journal of Industrial Organization, Elsevier, vol. 21(1), pages 97-127, January.
    4. Arthur Fishman & Rafael Rob, 2000. "Product Innovation by a Durable-Good Monpoly," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 237-252, Summer.
    5. Inderst, Roman, 2008. "Durable goods with quality differentiation," Economics Letters, Elsevier, vol. 100(2), pages 173-177, August.
    6. Jae Nahm, 2004. "Durable-Goods Monopoly with Endogenous Innovation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(2), pages 303-319, June.
    7. Nancy L. Stokey, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 355-371.
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    More about this item

    Keywords

    monopoly; durable goods; software; upgrades; price discrimination;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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