The Economics of Software Upgrades throughout the Product Life Cycle

Abstract

The utility obtained by a user from implementing a software product declines with time because the user’s expectations regarding the product are constantly evolving. A monopolist takes advantage of this fact and periodically updates the product with a new version to better satisfy user requirements. In this way, it gets repeat business for itself by selling the updated version to existing users. We find that the optimal time to upgrade declines with the product’s network externalities. At the beginning of the product life cycle, when the market is growing, the monopolist leverages incompatibility between the existing and updated versions to force existing users to upgrade more quickly. Further, the optimal time to introduce a new version is increasing in the rate of market growth. We also show when profit flows can increase by integrating two complementary software products.