Consumer Preferences for Product Updates Under Digitization: The Demand for Smartphone Applications

The digitization of durable goods gives firms the ability to monetize and update already purchased products, shifting firms’ focus from pushing consumers toward buying replacement products to locking in consumers through incremental updates. As a first step in understanding the effects of digitization, I investigate consumers’ preferences for product updates in Apple’s app ecosystem. Using a demand model that differentiates between large, feature-adding updates, and smaller, bug-fixing updates, I find that updates have a positive, non-transitory effect on demand, but that consumers do not differentiate based on the content of updates. Additionally, I find that consumers dislike paying for apps, but that conditional on paying, price sensitivity is low.