Versioning Goods and Joint Purchase: Substitution and Complementarity Strategies

ABSTRACT In the present paper, we develop a monopoly model of vertical product differentiation for analyzing the monopolist’s decision about the possibility of versioning goods as substitutes or complements when consumers can buy them simultaneously. In this context, we find that versioning goods as substitutes or complements is optimal for the monopolist if the cost of designing the bundle (the purchase of one unit of each version) is increasing, which implies that making variants closer substitutes reduces costs. However, if making variants closer substitutes is costly, the monopolist versions goods as complements only. The final result also depends on the degree of concavity and convexity of the cost function.