Analyzing Product Architecture Under Technological Change: Modular Upgradeability Tradeoffs

A modularly upgradeable product allows customers to keep pace with technology by replacing modules instead of updating the entire unit, thus minimizing development and production costs for the firm. Despite these advantages, seemingly few consumer products are modularly upgradable (rather they are integral from the users´ perspective). To offer possible explanations, and help guide firms in enhancing the relative attractiveness of modularity, we develop an economic model where the firm´s frequency of product introduction and the end-users´ frequency of upgrades are endogenous. We characterize the firm´s introduction decisions under 1) an integral upgrade strategy, where the entire product is newly designed each generation, and 2) a modular upgrade strategy, where individually upgraded components are offered. We find that, contrary to intuition, the value of modularity diminishes with the overall rate of innovation in component technologies. On the other hand, the value of modularity increases with the difference in the rates of improvement between components, and increases when customers are more technically sophisticated, when production costs are high, and when the performance loss due to modularization is low.