The Neo-Luddite's Lament: Excessive Upgrades in the Software Industry
Volume: Volume 31, No. 2
Issue: Summer 2000
Pages: pp. 253-272
Authors: Glenn Ellison and Drew Fudenberg
Title: The Neo-Luddite's Lament: Excessive Upgrades in the Software Industry
Abstract: We examine two reasons why a monopoly supplier of software may introduce more upgrades than is socially optimal when the upgrade is backward but not forward compatible, so users who upgrade reduce others' network benefits. One explanation involves a commitment problem: profits and social welfare may suffer because ex post the monopolist will want to sell the upgraded product to new consumers. The second involves consumer heterogeneity. Here oversupply arises from the difference between the externality that upgrades impose on the marginal and average consumer, and from the effect of upgrades on sales of the base good.
JEL Classification
Information and Internet Services
Computer Software (L860)
Market Structure, Firm Strategy, and
arket Performance: Monopoly
Monopolization Strategies cartels
collusion (L120)
Monopolists
Monopoly
Software