Versioning in the Information Economy: Theory and Applications

Price discrimination consists in selling the same product to different buyers at different prices. When sellers cannot relate a buyer's willingness to pay to some observable characteristics, price discrimination can be achieved by targeting a specific package (i.e., a selling contract that includes various clauses in addition to price) for each class of buyers. The seller faces then the problem of designing the menu of packages in such a way that each consumer indeed chooses the package targeted for her. This practice, known as versioning (or as second-degree price discrimination), is widespread in the information economy. In this paper, we propose a simple unified framework to study the general theory behind versioning and to consider a number of specific versioning strategies used in the information economy (namely, bundling, functional degradation and conditioning prices on purchase history)