Sequential product launches with post-sale updates

Abstract

As technology evolves, a seller may offer sequential releases of its product over time, with new versions offering superior performance. Beyond offering new product releases over time, sellers now increasingly have the option of offering post-sale software updates, thereby potentially extending product longevity. The potential to change product life cycles via software updates is of strategic importance, particularly since past and future product releases are interrelated. Considering stochastic technology evolution and strategic consumers, we study the strategy of augmenting paid product releases with free product updates. By contrasting this strategy against two benchmark product-launch policies without free updates, we show that offering free updates can generate nontrivial profit gains and optimally lengthen the seller’s new-product introduction cycles. We explore the sensitivity of the seller’s optimal release decisions and profit to key drivers, including costs and technology uncertainty. We also investigate the impact of consumer heterogeneity, distinct time-discount rates between the seller and consumers, and allowing multiple updates per product release. Our results show that while free updates ostensibly appear to favor consumers and do deliver utility to customers, they also are an effective mechanism for a seller to increase profits.