Pricing and rollout of durable product versions in the presence of maintenance costs
Abstract/Contents
- Abstract
- In many durable good contexts, firms have the opportunity to price discriminate on quality by charging higher prices for the latest functionality. In the software good market, on the other hand, we often do not observe price discrimination on the latest versions, despite new versions being introduced over time. I propose that the software firm's ability to price discriminate on latest functionality is restricted by two factors: (1) the extent to which different consumer types appreciate the innovation from one version to the next and (2) the extent to which legacy software products are costly for the firm to maintain. To analyze this question, I use a unique dataset on individual consumer subscriptions to a Fortune 500 firm's software products. The firm releases new product versions each year, but allows consumers to adopt the latest functionality for free. Despite this policy, descriptive analysis reveals that consumers frequently choose not to upgrade, electing to renew legacy versions of the product instead. To distinguish between the different factors driving this pattern, I develop a dynamic model of consumer choice of different product versions, renewal opportunities and upgrades. This model allows me to separately account for version usage utility, non-monetary costs of purchasing and upgrading and the heterogeneity therein. The estimates of the model reveal that although the majority of the consumers value the new versions, the high value, price insensitive consumers do not, causing it to be un- profitable for the firm to price latest functionality at a premium. Using the estimates and the structure of the model, I then show that if high value consumers were to sufficiently appreciate the firm's innovation, it would be profitable for the firm to charge a fee for the new functionality; however, sufficiently high costs of maintaining legacy versions eliminate such incentives. The final counterfactual allows me to calculate the minimum legacy version cost that would cause the firm to shift from releasing distinct intertemporal versions to maintaining one continuously upgraded version of the product.
Description
| Type of resource | text |
|---|---|
| Form | electronic; electronic resource; remote |
| Extent | 1 online resource. |
| Publication date | 2017 |
| Issuance | monographic |
| Language | English |
Creators/Contributors
| Associated with | Brecko, Kristina |
|---|---|
| Associated with | Stanford University, Graduate School of Business. |
| Primary advisor | Hartmann, Wesley R. (Wesley Robert), 1973- |
| Thesis advisor | Hartmann, Wesley R. (Wesley Robert), 1973- |
| Thesis advisor | Nair, Harikesh S. (Harikesh Sasikumar), 1976- |
| Thesis advisor | Reiss, Peter |
| Advisor | Nair, Harikesh S. (Harikesh Sasikumar), 1976- |
| Advisor | Reiss, Peter |
Subjects
| Genre | Theses |
|---|
Bibliographic information
| Statement of responsibility | Kristina Brecko. |
|---|---|
| Note | Submitted to the Graduate School of Business. |
| Thesis | Thesis (Ph.D.)--Stanford University, 2017. |
| Location | electronic resource |
Access conditions
- Copyright
- © 2017 by Kristina Brecko
- License
- This work is licensed under a Creative Commons Attribution Non Commercial 3.0 Unported license (CC BY-NC).
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