Selling or Leasing? Dynamic Pricing of Software with Upgrades

In this paper, we analyze the profitability of selling and leasing models by considering both software upgrades and different price discrimination strategies. We construct a two-period model to study software upgrades, consumers' inter-temporal purchase behavior, and the price discrimination strategy of a monopolist vendor. We analyze three price discrimination strategies: inter-temporal, behavior-based, and a hybrid price discrimination strategy. Meanwhile, we only consider a software upgrade with moderate improvement. We find that the monopolist should adopt the behavior-based price discrimination strategy with a reward for returning consumers under the selling model, but the inter-temporal price discrimination strategy with a rising price under the leasing model. Moreover, we find that under the inter-temporal price discrimination strategy, the leasing model is always more profitable than the selling model. While if the monopolist cannot commit to never using information about consumers' past purchase behavior for price discrimination (under the behavior-based price discrimination strategy), the selling model is more profitable than the leasing model. These findings provide new insights into the comparison of selling and leasing models