Optimal Upgrading Strategy for the Quality, Release Time, and Pricing for Software Vendor

Abstract

Software vendors often upgrade their software products in order to against rapid changes in the market. However, software vendors must often ensure a balance in the upgraded products of the early-release-but-low-quality and high-quality-but-late-release categories. In this article, we explore the optimal release strategy, quality design of an upgraded version, and optimal prices for a software vendor by constructing a two-period model under two different price discrimination strategies: the behavior-based pricing strategy (BBPS) and hybrid price discrimination strategy (HPDS). The optimal pricing strategy adopted by a software vendor depends on the quality of the initial version of the software. Specifically, if the quality of the initial version is lower, the HPDS is beneficial for the software vendor; otherwise, the software vendor can preferably adopt the BBPS. Moreover, under the HPDS, the optimal market coverage is invariably higher regardless of the quality of the initial version of the software, and consumers always receive a higher surplus, except when the research and development cost and speed are relatively lower under the lower quality of the initial version of the software. In addition, whether the quality of the initial version is higher or lower, the early-release strategy always leads to a higher profit for the software vendor.