Product development and pricing strategy for information goods under heterogeneous outside opportunities

This paper considers a two–stage development problem for information goods with costless quality degradation. In our model, a seller of information goods faces customers that are heterogeneous with regard to both the marginal willingness to pay for quality and the outside opportunity. In the development stage, the seller determines the quality limit of the product. In the second stage, the seller's problem is to design the price schedule corresponding to different quality levels, taking into account production and distribution costs.