Managerial Economics 13th Edition by James McGuigan,Charles Moyer,Frederick Harris

Exercise 5

Debugging Computer Software: Versioning at Intel 31
Debugging has been a way of life in the computer industry from its inception. Indeed, the origin of the term debugging derives from the daily process of removing dead moths from the thousands of electronic tubes in the ENIAC, the first electronic computer. Every piece of computer hardware or software ever shipped has likely had logic faults. Indeed, most popular software programs contained thousands of known "bugs" in their first-generation products. In 1994, incomplete debugging of the floating-point division calculator in the Pentium I computer chip caused a massive product recall that cost Intel $475 million dollars. In 2010, a $700 million product recall bug was found in an access chip to Intel's Sandy Ridge Quad Core processor. In extremely data-intensive environments, the design flaw caused the chip performance to degrade over time-for example, in the digital video processing for the highest-end PCs of HP and Dell.
Why do computer component manufacturers release products with known bugs One obvious answer is that delayed release may allow competitors to preempt the market with new technologies that render your product obsolete. Another important answer is a central insight of managerial economics that everything worth doing is not necessarily worth doing well. Computer design and manufacturing firms face a rising marginal cost of correcting thousands of bugs detected by their beta testing processes. At some point, each firm must balance the lost sales and replacement costs from product recalls against the ever-increasing cost of design perfection from more debugging.
A somewhat surprising third answer may, however, hold the key: fixing bugs in subsequent generations of software sells upgrades. Early Microsoft Windows products had a nasty bug that caused the program to crash with the finality of a hopeless error message-"unrecoverable application error." Microsoft fixed the bug and proceeded to sell millions of copies of the upgrade. Bugs in programs limit their durability, and in technology businesses the selling of upgrades is a part of the business plan. Hal Varian, chief economist of Google, calls this practice "versioning." Of course, Microsoft Windows operating system has built the ultimate powerhouse business out of selling upgrades.
Discuss the practice of selling upgrades as a mechanism design.