Technology Timing and Pricing In the Presence of an Installed Base

This paper studies a vendor.s timing and pricing strategies to tackle its own installed base when selling a newly improved product. We characterize the market with either a partly- or fully- covered installed base, consumers. relative willingness to pay for the newly improved version of the product, and their relative payoffs from delayed purchase. Instead of using the conventional assumption of constant consumer reservation price, we propose that if consumers already own an existing (old) version of a durable product, their willingness to purchase the newly improved version would increase over time. This effect, interweaving with consumer heterogeneity on valuation of quality and purchase history, may enable perfect intertemporal price discrimination (Salant 1989). We find that upgrade pricing may not be able to differentiate consumers with different purchase history when consumer heterogeneity is sufficiently high. Instead, the vendor would maximize its profit through intertemporal price discrimination, delayed product introduction, or pooling pricing. By overcoming the intractability of studying delayed product introduction in a market with heterogeneous consumers, this study analytically confirms Fishman and Rob.s conjecture (2000) that heterogeneity in consumers. valuation of quality may discourage a vendor to launch a new product. Particularly, consumers. anticipation of future price reduction can lead to delayed product introduction even when the extent of quality improvement embodied in the new product is high.New product introduction, intertemporal price discrimination, delayed product introduction, installed base, upgrade policy

Pricing Software Upgrades: The Role of Product Improvement & User Costs

The computer software industry is an extreme example of rapid new product introduction. However, many consumers are sophisticated enough to anticipate the availability of upgrades in the future. This creates the possibility that consumers might either postpone purchase or buy early on and never upgrade. In response, many software producers offer special upgrade pricing to old customers in order to mitigate the effects of strategic consumer behavior. We analyze the optimality of upgrade pricing by characterizing the relationship between magnitude of product improvement and the equilibrium pricing structure, particularly in the context of user upgrade costs. This upgrade cost (such as the cost of upgrading complementary hardware or drivers) is incurred by the user when she buys the new version but is not captured by the upgrade price for the software. Our approach is to formulate a game theoretic model where consumers can look ahead and anticipate prices and product qualities while the firm can offer special upgrade pricing. We classify upgrades as minor, moderate or large based on the primitive parameters. We find that at sufficiently large user costs, upgrade pricing is an effective tool for minor and large upgrades but not moderate upgrades. Thus, upgrade pricing is suboptimal for the firm for a middle range of product improvement. User upgrade costs have both direct and indirect effects on the pricing decision. The indirect effect arises because the upgrade cost is a critical factor in determining whether all old consumers would upgrade to a new product or not and this further alters the product improvement threshold at which special upgrade pricing becomes optimal. Finally, we also analyze the impact of upgrade pricing on the total coverage of the market

Delayed Product Introduction

We investigate the incentives of a monopolistic seller to delay the introduction of a new and improved version of his product. By analyzing a three-period model, we show that the seller may prefer to delay introducing a new product, even though the enabling technologies for the product are already available. The underlying motivation is analogous to that found in the durable goods monopolist literature – the seller suffers from a time inconsistency problem that causes his old and new products to cannibalize each other. Without the ability to remove existing stock of the old product from the market, shorten product durability, or pace research and development (R&D), he may respond by selling the new product later. We characterize the equilibria with delayed introduction, and study their changes with respect to market and product parameters. In particular, we show that delayed introduction could occur regardless of whether the seller can offer upgrade discounts to consumers, that instead, it is related to quality improvement brought about by the new product, durabilities, and discount factors. Further, we show that delayed introduction could bring socially efficient outcomes as well. Based on the insights of the model, we provide practical suggestions on pricing and policies

The Effects of Sensitization and Habituation in Durable Goods Markets

We develop a model to study the impact of changes in price sensitivity on the firm as it introduces multiple generations of a durable product where unit costs are a convex function of quality. We incorporate the psychological processes of sensitization and habituation into a model of discretionary purchasing of replacement products motivated by past experience. When price sensitivity decreases with each purchase (sensitization), the myopic firm offers a higher quality product at a much higher price with each generation. When price sensitivity increases with each purchase (habituation), the myopic firm engages in price skimming. When sensitization is followed by habituation, the myopic firm eventually provides higher quality than the market is willing to pay for, leading to a steep drop-off in sales and profits. The actions of the forward-looking firm depend on the discount rate. A firm with a low discount rate builds its customer base before offering a higher quality and higher priced product. In contrast, a firm with a high discount rate quickly increases price and quality following the same path to falling profits of the myopic firm. These results provide insight into the firm and consumer behaviors underlying the phenomenon of 'performance oversupply' identified in the innovation literature

Selling and Leasing Software with Network Externality

Previous studies suggested that a monopoly durable goods seller can use leasing to effectively avoid the time-inconsistent problem raised by Coase Conjecture. This paper extends those previous works by examining the monopoly seller's selling and leasing strategy for a special type of durable good --- software. We look at a software vendor that can sell (at a posted price) or lease his product where as a lesser he guarantees that the lessees will always have the latest version of the software. We address some of the specific issues of implementing the selling and/or leasing policies at the packaged software market, including the impact of network externality, upgrade compatibility, and commitment on pricing in a dynamic environment. We show that by properly defining their pricing structure, software vendors can segment the market and second-degree price discriminate the consumers. We also demonstrate how software vendors can manage the trade-offs of selling and leasing to achieve a higher profit as well as the corresponding welfare effect on the consumers

Six Challenges in Platform Licensing and Open Innovation

This article describes six common challenges of design, incentives, and governance that arise in establishing platform businesses. It also proposes solutions. It considers, for example, how to open a platform to decentralized innovation yet still earn a return; how to incorporate best-of-breed innovations from different sources while avoiding problems of multi-party hold-up; and how to encourage sources of good ideas to contribute those ideas despite the risk of losing them to owners of indispensible complements. We express these issues and solutions as a reduced set of tradeoffs useful for managing information and technology property.licensing, open source, free software, dual licensing, platform, intellectual property.

New product introduction and diffusion with costly search

Will the low search cost in the new economy help speed up new product introduction? The usual model of product market search suggests that a low search cost can turn out to have detrimental incentives on innovation and new product introduction as the low search cost erodes firms' market power, attenuating the profit from innovation. This usual model, however, misses the important dimension of product market search that how often it pays to search depends on the magnitude of the search cost. This paper studies a model of monopolistic competition with costly search, where the point of departure is that of a fixed cost of a shopping trip. With this fixed cost, the optimal search frequency is tied to the magnitude of the search cost. In this environment, a low search cost could turn out to be favorable to innovation. At a low search cost, consumers search more often, speeding up the diffusion of new products and possibly resulting in higher profits for firms, despite the erosion of market power.product market search, innovation, new product introduction

Pricing online subscription services under competition

In recent times, rapid advances in the field of information technology have enabled firms selling information products (for example, in the form of a CD) to provide subscription services using remote servers. Making the product versus service decision involves a trade-off. Online subscription offerings are perceived to be of lower quality because of data security and network reliability issues but can reduce or even eliminate the credible commitment (of prices) problem typically faced by firms selling durable products. We model an infinite horizon game between two symmetric firms that choose the design architecture, that is, product or service (and consequent contracting scheme: selling or subscription) and then set prices to optimize profits. The perceived quality loss enables firms to differentiate based on design architecture/contracting scheme and make positive profits. Further, the firm that sells a product makes higher profit than the firm that offers a subscription service. However, as the discount factor increases, the presence of a seller leads to a credible commitment problem for both firms leading to a reduction in prices. The results offer an explanation for the persistence of firms selling products rather than services. Further, a firm offering a subscription service may be subject to price pressure due to the price commitment issues of a competing seller. We also extend our insights to other settings: one involving asymmetric firms and the other involving different discount rates for product quality and producer/consumer surplu