INTRODUCTION Information goods such as computer software or electronic newspapers can be provided by firms at a low marginal cost, while in many cases large capital outlays are required to produce their first unit. The substantial setup cost is thereby mainly driven by the cost of developing the top quality product. Having established this "flagship" product, a firm can degrade it or in other ways modify it, and in this way create a multitude of products at a small "versioning" cost. Finding optimal versioning strategies for information goods is becoming increasingly important for Internet commerce, as low distribution costs and newfound customer intimacy render intricate second-degree price discrimination strategies feasible.