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

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  • 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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Suggested Citation

  • Glenn Ellison & Drew Fudenberg, 1999. "The Neo-Luddite's Lament: Excessive Upgrades in the Software Industry," Harvard Institute of Economic Research Working Papers 1870, Harvard - Institute of Economic Research.
  • Handle: RePEc:fth:harver:1870
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    Cited by:

    1. 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.
    2. Soetevent Adriaan R. & Schoonbeek Lambert, 2006. "Price-Setting Behavior in the Presence of Social Interactions," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 226(2), pages 208-228, April.
    3. Jong-Hee Hahn & Jin-Hyuk Kim, 2015. "R&D Investment, Planned Obsolescence, and Network Effects," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 171(4), pages 652-665, December.
    4. Jennifer Zhang & Abraham Seidmann, 2006. "Selling and Leasing Software with Network Externality," Working Papers 06-13, NET Institute, revised Aug 2006.
    5. Ramon Caminal, 2016. "Dynamic Product Diversity," Journal of Industrial Economics, Wiley Blackwell, vol. 64(1), pages 1-26, March.
    6. Anton, James J. & Biglaiser, Gary, 2013. "Quality, upgrades and equilibrium in a dynamic monopoly market," Journal of Economic Theory, Elsevier, vol. 148(3), pages 1179-1212.
    7. Alessandro Pavan & Renato Gomes, 2011. "Many-to-Many Matching Design and Price Discrimination," 2011 Meeting Papers 1212, Society for Economic Dynamics.
    8. Athanasopoulos, Thanos, 2014. "Compatibility, Intellectual Property,Innovation and Welfare in Durable Goods Markets with Network Effects," The Warwick Economics Research Paper Series (TWERPS) 1043, University of Warwick, Department of Economics.
    9. repec:eee:ejores:v:266:y:2018:i:3:p:1044-1061 is not listed on IDEAS
    10. 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.
    11. Sang‐Ho Lee & Le Duc Niem, 2010. "A Note On Durable Goods Monopolists: Commitment To Forward Compatibility," The Japanese Economic Review, Japanese Economic Association, vol. 61(4), pages 558-564, December.
    12. 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 14-209, W.E. Upjohn Institute for Employment Research.
    13. Athanasopoulos, Thanos, 2014. "Incentives to Innovate, Compatibility and Efficiency in Durable Goods Markets with Network Effects," The Warwick Economics Research Paper Series (TWERPS) 1054, University of Warwick, Department of Economics.
    14. Liu, Hsin-Hsien, 2013. "How promotional frames affect upgrade intentions," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 237-248.
    15. Morgan, Horatio M. & Ngwenyama, Ojelanki, 2015. "Real options, learning cost and timing software upgrades: Towards an integrative model for enterprise software upgrade decision analysis," International Journal of Production Economics, Elsevier, vol. 168(C), pages 211-223.
    16. A. Banerji & Bhaskar Dutta, 2004. "Networks, Network Externalities and Market Segmentation," Working papers 124, Centre for Development Economics, Delhi School of Economics.
    17. Awrey, Dan, 2013. "Toward a supply-side theory of financial innovation," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 401-419.
    18. Atsuo Utaka, 2015. "High Price Strategy and Quality Signalling," The Japanese Economic Review, Japanese Economic Association, vol. 66(3), pages 408-420, September.
    19. Cerquera Dussán, Daniel, 2007. "Durable Goods, Innovation and Network Externalities," ZEW Discussion Papers 07-086, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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