Research Note - When Is Versioning Optimal for Information Goods?

This paper provides insights about when versioning is an optimal strategy for information goods. Our characterization of this class of goods is that variable costs are invariant with quality, including the special case of zero variable costs. Our analysis assumes a monopoly firm that has an existing product in the market and has an opportunity to segment the market by introducing additional lower-quality versions. We derive a simple decision rule for determining the optimality of versioning based on the solution to a single product maximization problem. Versioning is optimal when the optimal market share of the lower quality version, offered alone, is greater than the optimal market share of the high quality version, offered alone. A firm can profitably employ versioning for an information good if it can design the lower quality in a way that, relative to their valuations for the high-end version, high-type consumers have a lower relative valuation for the lower quality than do low-ty...

• Type: Journal
• Year: 2008
• Where: MANSCI
• Authors: Hemant K. Bhargava, Vidyanand Choudhary
• Keywords: Lower Quality, MANSCI 2008, Optimal Market Share, Variable Costs