Market Segmentation and Software Security: Pricing Patching Rights

Abstract

The patching approach to security in the software industry has been less effective than desired. One critical issue with the status quo is that the endowment of “patching rights” (the ability for a user to choose whether security updates are applied) lacks the incentive structure to induce better security-related decisions. However, producers can differentiate their products based on the provision of patching rights. By characterizing the price for these rights, the optimal discount provided to those who relinquish rights and have their systems automatically updated in a timely manner, and the consumption and protection strategies taken by users in equilibrium as they strategically interact because of the security externality associated with product vulnerabilities, it is shown that the optimal pricing of these rights can segment the market in a manner that leads to both greater security and greater profitability. This policy greatly reduces unpatched populations and has a relative hike in profitability that is increasing in the extent to which patches are bundled together. Social welfare may decrease when automated patching costs are small because strategic pricing contracts usage in the market and also incentivizes loss-inefficient choices. However, welfare benefits when the policy either (1) greatly expands automatic updating in cases in which it is minimally observed or (2) significantly reduces the patching process burden of those who most value the software. This paper was accepted by Anandhi Bharadwaj, information systems.