Browsing by Author "Wei, Xueqi (David)"

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    Experience information goods: “Version-to-upgrade”
    (Elsevier, 2013) Nault, Barrie R; Wei, Xueqi (David)
    In contrast to “search goods” whose true quality can be determined before inspection, we examine information goods that are “experience goods” — goods whose true quality can only be determined through use. We analyze a “version-to-upgrade” strategy where a monopolist generates vertically differentiated versions as bridges that lead consumers to experience the goods so that they can assess their true quality, and then provide upgrades to consumers that initially purchase lower quality versions. Adopting a two-stage model, we find that if consumers have homogeneous expectations about quality before experience, then the version-to-upgrade strategy involves upgrading all the consumers that in the first stage purchased the low quality version. In this way, consumers that upgrade effectively pay a tax for learning. When consumers have heterogeneous expectations about quality before experience, if consumers are pessimistic, then the version-to-upgrade strategy still drives all consumers to upgrade. However, if consumers are optimistic, then, the version-to-upgrade strategy may induce only some of the consumers that initially purchased the low quality version to upgrade. As profits from upgrades increase, the monopolist sets the quality of the low quality version to the lowest quality that can feasibly reveal the true quality, justifying the use of trial or demonstration versions.
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    Monopoly Versioning of Information Goods When Consumers Have Group Tastes
    (Wiley, 2014-06) Nault, Barrie R; Wei, Xueqi (David)
    Large sunk costs of development, negligible costs of reproduction, and distribution resulting in economies of scale distinguish information goods from physical goods. Versioning is a way firms may take advantage of these properties. However, in a baseline model where consumers differ in their tastes for quality, an information goods monopolist only offers one version, and this differs from what we observe in practice. We explore formulations that add features to the baseline model that result in a monopolist offering multiple versions. We examine versioning where consumers differ in individual tastes for quality, and groups of consumers that share the same group taste are delineated by segments of individual tastes. We find that if groups have mutually exclusive characteristics—a horizontal dimension—that they value relative to the shared characteristics, then versioning is optimal. Consequently, any horizontal differentiation in product line design favors versioning. In addition, when group tastes are hierarchical such that higher taste groups value characteristics that lower taste groups value but not vice versa—a vertical dimension—as long as the valuations of the higher and adjacent lower taste group are sufficiently close, then versioning is also optimal. Our conditions, which also help determine how many versions are optimal, are based on exogenously defined parameters so that it is feasible to check them in practice.