LAUSR

Abstract As technology improves and demand changes, products gradually become out of date over time, so firms can introduce new versions to make profits. Meanwhile some products come with an after-sale maintenance service which is included in the product purchase. Firms can affect the customer purchase and replacement decisions by adjusting their upgrade strategy and maintenance time simultaneously, so it is important for firms to coordinate the upgrade strategy and maintenance time. In this article, we study the interaction between upgrade frequency and maintenance time, and find that when the gap between customers’ willingness to pay is small, firms should provide a short maintenance time and reduce the upgrade frequency. When the gap between customers’ willingness to pay is large, firms should provide a long maintenance time and increase the upgrade frequency. In this case, firms implement a “price discrimination” policy by influencing customers’ replacement frequency to earn higher profits. Usually, two hidden costs exist in the product upgrade process: the fragmentation costs and customer switching costs. The existence of fragmentation costs and switching costs is equivalent to the reduction of product quality and the increase of development cost respectively. Ignoring these two costs can lead firms to provide a longer maintenance time than optimal.