Cost Drivers of Versioning: Pricing and Product Line Strategies for Information Goods

In this paper, we extend the understanding of versioning strategy of an information goods monopolist and provide new insights on when versioning is optimal. To do so, we derive the optimal product line or versions of an information good and the corresponding prices. By relaxing common assumptions on consumers’ usage costs, versioning costs and capital research and development costs, we provide new insights as well as reconcile extant findings on versioning. For a good with no-free-disposal (NFD), i.e., one where consumers have usage costs, our results show that a monopolist’s marginal cost and consumers’ usage costs have the same impact on its versioning strategy, and that these factors are the sole reason for optimality of versioning of information goods. By endogenizing the production of the highest-quality, we show that capital costs create a downward distortion of quality even for the highest types in the market even under full information. Presence of separate versioning costs also lowers the qualities served to the high types and reduces the segment of consumers who are served with product versions. However, versioning costs do not affect market coverage or the price-quality menu itself. Further, when some of the consumer usage costs are absorbed by the firm (as in case of cloud-based provisioning), it does not necessarily lead to market expansion. This paper was accepted by Chris Forman, information systems.