Product Development and Pricing Strategy for Information Goods Under Heterogeneous Outside Opportunities

This paper considers a two-stage development problem for information goods with costless quality degradation. In our model, a seller of information goods faces customers that are heterogeneous with regard to both the marginal willingness to pay for quality and the outside opportunity. In the development stage, the seller determines the quality limit of the product. In the second stage, the seller’s problem is to design the price schedule corresponding to different quality levels, taking into account production and distribution costs. We show that versioning is optimal for the seller when customers have multiple outside options, or more generally, convex reservation utilities. In addition, we show that in the optimal solution, the seller discards both low-end and high-end customers. Among those that are served, the seller offers a continuum of (inferior) versions to customers with relatively low willingness to pay, and extracts full information rent from each of them. A common vers...

• Type: Journal
• Year: 2007
• Where: ISR
• Authors: Ying-Ju Chen, Sridhar Seshadri
• Keywords: Customer, Distributed And Parallel Computing, ISR 2007, Quality Limit, Seller