Research Associate and Visiting Lecturer, Goizueta Business School, Emory University; Ph.D. candidate, Department of Economics, University of Southern California; Indian Administrative Service (IAS)
Literature has identified factors such as piracy, network externality, or concave cost of producing quality as key drivers of software versioning. However, software firms adopt versioning strategies that are often invariant across different market settings. To explain universal business practice of software versioning, we focus on ÒinconvenienceÓ or disutility that users experience when software has lower functionality than what they require to accomplish tasks. In our model, users are heterogeneous on marginal valuation for functionality and the required level of functionality such that those with higher valuation have a higher required level of functionality. Users do not derive any additional utility if the software has more functionality than what they require. We show that heterogeneous disutility from underprovisioning of functionality is a sufficient condition for optimality of versioning under fairly general conditions. We also show that, as high-type users' required level of functionality increases, the firm increases the functionality level of the high version. Yet surprisingly, the firm may decrease the functionality level of the low version if the proportion of high-type users is moderate. On the other hand, as the required level of functionality of low-type users increases, the firm may reduce the functionality level of the low version when the proportion of high-type users is high, though the functionality level of the high version remains the same. Counterintuitively, an increase in the high-type (low-type) users' required level of functionality negatively (positively) impacts high-type users' consumer surplus.
Advances in information-acquisition technologies and the increasing strategic importance of this information have created a market for consumers' personal and preference information. Behavioral research suggests that consumers engage in a privacy calculus where they trade off their privacy costs from sharing information against their value from personalization. Through a formal economic model of this personalization-for-privacy (p4p) trade-off, we examine welfare implications by characterizing consumption utilities as "no-free-disposal" functions. We investigate the optimality of four regulatory regimes (through allowance/disallowance of usage-enforcing technologies, and private contracts) by analyzing the strategic interaction between a monopolist who offers personalization services "free of charge" and two consumer types--privacy and convenience seekers. While many privacy watchdog groups have called for technology restrictions and more regulation, our research broadly suggests that society is better off with assignment of property rights over their information to consumers and full allowance of technological control and contractual abilities for the monopolist. However, when private contracts are proscribed, the regulator should also prevent the deployment of usage-enforcing technologies, particularly when the market is predominantly composed of privacy seekers. Interestingly, unlike traditional price-instrument markets for goods with free disposal, a regulator should not only encourage this market's knowledge of consumers' p4p preferences but also the various uses and benefits of preference information to the vendor.
Digital goods lend themselves to versioning but also suffer from piracy losses. This paper develops a pricing model for digital experience goods in a segmented market and explores the optimality of sampling as a piracy-mitigating strategy. Consumers are aware of the true fit of an experience good to their tastes only after consumption, and as piracy offers an additional (albeit illegal) consumption opportunity, traditional segmentation findings from economics and sampling recommendations from marketing, need to be revisited. We develop a two-stage model of piracy for a market where consumers are heterogeneous in their marginal valuation for quality and their moral costs. In our model, some consumers pirate the product in the first stage allowing them to update their fit-perception that may result in re-evaluation of their buying/pirating decision in the second stage. We recommend distinct pricing and sampling strategies for underestimated and overestimated products and suggest that any potential benefits of piracy can be internalized through product sampling. Two counterintuitive results stand out. First, piracy losses are more severe for products that do not live up to their hype rather than for those that have been undervalued in the market, thus requiring a greater deterrence investment for the former, and second, unlike physical goods where sampling is always beneficial for underestimated products, sampling for digital goods is optimal only under narrowly defined circumstances due to the price boundaries created by both piracy and segmentation.
Even if bandwidth on the Internet is limited, compression technologies have made online music piracy a foremost problem in intellectual copyright protection. However, due to significantly larger sizes of video files, movies are still largely pirated by duplicating DVDs, VCDs, and other physical media. In the case of DVDs, movie studios have historically maintained different technology codes or formats across various regions of the world, primarily to control the timing of theatrical releases in these parts of the world. This paper formulates an analytical model to study the implications of maintaining different or incompatible technology standards in DVD and other optical disc players on global pricing and piracy of movie discs. Our formulation develops two distinct piracy types, namely, regional and global piracy, signifying if consumers will pirate movies released for their own region or those meant for other regions. Our results find that maintaining separate technology standards is very critical when there is piracy, as losses from global piracy can be higher than when only regional piracy exists. Further, we observe that piracy is not a victimless crime, in that not only do producers suffer losses but consumers in regions with high willingness to pay for quality also stand to lose. In addition, we find that increasing homogeneity in consumer preferences for quality across regions may not be beneficial to digital product vendors unless there is also uniformity in copyright protection laws. We conclude with recommendations for research and practice for movie studios as well as producers for other goods that are dependent on copyright protection such as books and pharmaceuticals.