When to degrade a product: The utility-to-cost ratio rule

Mike Vo

Economics Letters, 2025, vol. 255, issue C

Abstract: This paper analyzes product degradation as a screening tool under asymmetric information, emphasizing cost-efficiency over traditional concerns about information rents. Using the virtual surplus framework, we derive a sharp, distribution-free condition for profitable versioning: a degraded product should be introduced if and only if its utility-to-cost ratio exceeds that of the full-featured version. We then examine settings with multiple low-end options and identify two sufficient conditions for optimal design. The firm prefers the more degraded product when it offers a superior cost-efficiency of utility reduction, and the less degraded one when it offers a better cost-efficiency of utility delivery.

Keywords: Versioning; Screening; Cost-efficiency; Virtual surplus (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:255:y:2025:i:c:s0165176525004148

DOI: 10.1016/j.econlet.2025.112577

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