Competitive Behavior-Based Price Discrimination for Software Upgrades

Abstract

T he introduction of product upgrades in a competitive environment is commonly observed in the software industry. When introducing a new product, a software vendor may employ behavior-based price discrimination (BBPD) by offering a discount over its market price to entice existing customers of the competitor. This type of pricing is referred to as competitive upgrade discount pricing and is possible because the vendor can use proof of purchase of a competitor's product as credible evidence to offer the discount. At the same time, the competitor may offer a discount to its own previous customers in order to induce them to buy its upgrade. We formulate a game-theoretic model involving an incumbent and entrant where both firms can offer discounts to existing customers of the incumbent. Although several equilibrium possibilities exist, we establish that an equilibrium with competitive upgrade discount pricing is observed only for a unique market structure and a corresponding unique set of prices. In this equilibrium, instead of leveraging its first mover advantage, the incumbent cedes market share to the entrant. Furthermore, the profits of both the incumbent and the entrant reduce with switching costs. This implies that the use of BBPD has product design implications because firms may influence the switching costs between their products by making appropriate compatibility decisions. In addition, lower switching costs result in reduced consumer surplus. Hence, a social planner may want to increase switching costs. The resulting policy implications are different from those prevalent in other industries such as mobile telecommunications where the regulators reduced switching costs by enforcing number portability.

Technology Mergers and Acquisitions in the Presence of an Installed Base: A Strategic Analysis

“…These consumers may switch or upgrade to future versions of the Windows operating system. general conclusion in this literature is that the utility specification of consumers, production costs, and demand variability and other market risks may affect firms' versioning decisions (see, e.g., Koca et al, 2010;Mehra et al, 2012). The focus of these works lies in identifying the necessary and/or sufficient conditions for product versioning, but not whether firms have incentives to ease multi-product competition or facilitate new product introduction through structural changes such as M&A.…”

“…Instead, we study the vendors' strategies when they can variously compete or form a coalition. Our model adopts some commonly used market characteristics -vertically differentiated products, overlapping product generations, competition, and the possibility to offer upgrade pricing (Li and Graves, 2012;Mehra et al, 2012;Liu and Zhang, 2013), but we want to identify and characterize additional product line and pricing strategies available to a coalition. Our setting is related to the one in Goettler and Gordon (2011), which compares innovation rates and social welfare between monopoly and duopoly in the microprocessor industry.…”

“…Hence, different consumers may prefer different product generations at different time and may buy multiple generations of the same product over time (Dogan et al, 2011;Goettler and Gordon, 2011;Mehra et al, 2012). Consumers who have more urgent needs for online marketing solutions may be willing to purchase Eloqua's services and subsequently upgrade to use Oracle's platform solutions.…”

Mathematical Formulation and Analysis of the Optimal Launch Timing for Mobile Applications with Perceived Value and Network Effect

“…In a competitive market, firm decisions may be affected by new factors, such as consumer switching cost, as investigated by Mehra et al [25].…”

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“…2,11 We focus here on providing a new way to quantify how users benefit from upgrades, so we won't summarize the body of literature. But it's clear that the user isn't the only stakeholder, and user benefit isn't the only variable.…”