A substantial portion of information goods is sold through upgrades. I model a monopolist offering successive generations of an information good in a dynamic model. In each period, the monopolist offers up to two prices for each generation: a full price to those who have never purchased and a version upgrade price to consumers who own a previous generation. I employ an overlapping generations model with infinite-lived firms and consumers that reflects the effect of future profits on current decisions better than previous two-period models. The model's predictions accord well with data from the PC software industry. The model explains why: 1) firms issued version upgrades with every new generation, 2) firms provided a discount to those upgrading relative to first-time buyers and 3) late adopters commonly purchased the latest version at full price even though some earlier adopters with higher valuations did not upgrade to the latest version.
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V. Brian Viard (2007) studied this question.