The Neo-Luddite's Lament: Excessive Upgrades in the Software Industry

Glenn Ellison () and Drew Fudenberg

RAND Journal of Economics, 2000, vol. 31, issue 2, 253-272

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.

Date: 2000
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