New Features Free of Charge? Intertemporal Product Versions and Pricing in the Software Market.

This article empirically examines a software firm's intertemporal product versioning and upgrade pricing decisions, focusing on why software markets often deviate from typical durable goods pricing strategies that charge premiums for the latest product versions. Using detailed subscription and upgrade data from a Fortune 500 software firm, the study finds that high-value, price-insensitive consumers tend to prefer legacy versions over new ones, while low-value, price-sensitive consumers are more inclined to adopt newer versions. This consumer heterogeneity, combined with significant costs of maintaining legacy software versions, limits the firm's ability to price-discriminate on new functionality and rationalizes the industry trend toward offering free and automatic upgrades rather than distinct, priced intertemporal versions. Counterfactual analyses further suggest that phasing out legacy versions and implementing automatic upgrades can increase firm profits by shifting consumer behavior toward new subscriptions, supporting both cost and demand explanations for current software industry practices.