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Versioning (Background (What is quality (Vertical Attributes, Lower or…
Versioning
Background
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What is quality
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clock speed, features removed from product
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Versioning
When consumers differ in tastes for quality, monopolist will provide one version
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Wei and Nault 2014
Setting
Kurzweil Software - horizontal differentiated - base, surgeons, architect version, etc
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Multiplicative Utility U(k,q,Theta) = Kn*Qn.Theta
Venfor Max Profits by choice of indifferent customer, ST IR and IC
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Model
Discrete group tastes, individual tastes continuous, group and individual tastes are correlated
There are product characteristics shared across all versions, and mutually exclusive characteristics to each version
Findings
When consumers value mutually exclusive characteristics relative to shared characteristics, then versioning is optimal (Kn>Kn-1)
When there is a risk of cross purchasing, monopolist reduces the quality of lower product and increases quality of higher product
Wei and Nault 2013
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Findings
If customers have homogenous expectations about product quality, monopolist will drive all customers who chose Ql in the first stage to upgrade
If heterogenous, if they are pessimistic about quality in stage1, monopolist can drive all to upgrade in the second stage
If optimistic in the first stage, only few customers can upgrade
Optimal quality of high Q version is a tradeoff between higher profits from customers purchasing high Q product, and more upgrades, versus the increased costs of increasing Q
Optimal quality of low Q product is a tradeoff between high Q customers migrating to low Q product and an increase in the number of customers that purchase low Q product
Method
Heterogenous customer preference for quality, Theta.
Customer expectation fo quality R(Theta, Q)
1st stage: customers choose 0, Ql or Qh. 2nd stage, those who bought Ql choose if upgrade
Bhargava and Choudhary 2001. If consumers agree on the preferences for different versions, it is vert diff. "Conclude that a firm selling information goods will not benefit from inducing consumer self-selection through vertical differentiation"