Abstract: To entice repeat purchases of successive-generation products, many firms usually offer trade-in programs that allow buyers of the old generation product to purchase the new generation product at a discounted price by trading in the old product. More recently, a new typical upgrade program has arisen in the market under which consumers can trade in used products and meanwhile receive a full service beyond the base warranty one. For example, Apple Inc. has launched an upgrade program “Apple Care + ” in 2016. As consumers become more strategic in planning their purchases of the current and new generation products, the pricing decision of successive generations of product becomes more complicated because a multitude of factors affect a consumer’s purchasing decision. To fill this gap, a mathematical model in which a monopolistic manufacturer sells the first generation product in the first period and the second generation product in the second period is developed; however, the firm offers an upgrade program that customers can participate in when purchasing the first generation product in the first period. To participate, each customer has to pay a nonrefundable fee in the first period so that he is eligible to obtain a full service in the first period and has the option to trade-in her first generation product the second generation at a discounted price in the second period. It is supposed there are two types of consumers in the market and the valuation of the same product among fashionable customers are lower than that among economical consumers. Fashionable consumers always replace the latest products at each stage, while the economical consumers buy current products in the first stage and continue to use them in the second stage. By analyzing a two-period game, the optimal prices of current and new generation and optimal purchasing behaviors of each type of customers are determined. The Analytic solution analysis reveals that the product prices are affected by the fee to participate in the upgrade program, the trade-in discount parameter and the innovation level of the new generation product when implementing the upgrade program. Compared with the non-implementing the upgrade program, the demand for economical consumers get higher with the higher trade-in discount parameter, and the demand for fashionable consumers get higher with the lower recycling price of the secondary market. It is also derived from numerical analysis that upgrade program can benefit the manufacture when the fee to participate in, service level and the discount parameter are within a specific range. A theoretical fundament for the future research is set, and some managerial insights for enterprises when offering the upgrade program are provided.

Key words: upgrade program; full service; trade-in; consumer segmentation; pricing