Market Research and Innovation Strategy in a Duopoly
Marketing Science
Do Innovations Really Pay Off? Total Stock Market Returns to Innovation
Marketing Science
Platform-based information goods: The economics of exclusivity
Decision Support Systems
Marketing Science
Foreign investigations in the field of game-theoretic analysis of innovations
Automation and Remote Control
Perpetual Versus Subscription Licensing Under Quality Uncertainty and Network Externality Effects
Journal of Management Information Systems
Competitive Behavior-Based Price Discrimination for Software Upgrades
Information Systems Research
A generalized model of partial resale
Decision Support Systems
Decision Support Systems
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When an improvable durable good (such as packaged software) saturates the market, the seller could be tempted to release new versions too frequently, hurting her profit. A novel contractual device, which I term as a Free New Version Rights warranty (free NVR warranty), can help the seller overcome this temptation. In a two-period game-theoretic model involving a monopolist firm facing heterogeneous consumers, I derive conditions under which a rational monopolist can act suboptimally: She could face a commitment problem and offer the new version, even if doing so lowers her overall profit. Profit is hurt because when consumers expect a new version, (a) fewer consumers buy the initial version, and (b) the monopolist is forced to charge a lower price for the initial version. I show how the free NVR warranty, which requires the monopolist to offer consumers the right to receive the new version for free for a limited period, can solve her commitment problem. This is a new, surprising finding: By bundling new-version rights with the initial version, the monopolist at first appears to be denying herself future revenue. I derive conditions under which this apparently unprofitable action is optimal, which is my main contribution. When free NVR is offered, consumer surplus decreases and social surplus increases. This work extends prior literature on durable goods and the Coase conjecture to innovative durable goods with network externalities. The findings have important practical implications for firms selling new versions of innovative durable goods subject to network effects, as well as for their consumers.