Abstract: "Out of the recent popularity of downloadable contents (DLC)
among video game manufac-
turers has resurfaced the issue of versioning of informatio
n goods. The central idea behind
the zero-day DLC strategy is that consumers who find the base v
ersion of a game to be suffi-
ciently attractive would pay a premium to upgrade by purchas
ing such a DLC. In this work,
we combine the literature on versioning with that on product
sampling to model the impact
of consumer learning on the product-line strategy of a game m
anufacturer. In doing so, we
demonstrate that a manufacturer's desire to vertically diff
erentiate could actually stem from a
horizontal separation among consumers. When consumers diff
er in their perception of the fit
between their tastes and the features of the product, horizo
ntal differentiation seems a natural
choice. However, if the manufacturer is unable to classify p
otential consumers into groups with
distinct tastes, horizontal differentiation becomes impra
ctical. We find that, interestingly, this
inability to differentiate horizontally does not limit the m
anufacturer from vertically positioning
its product line. We characterize the conditions under whic
h the DLC strategy is effective and
discuss how it affects consumer and social welfare. Our resul
ts also have obvious implications
in markets for other digital experience goods."