When to degrade a product: The utility-to-cost ratio rule

This paper analyzes product degradation as a screening tool under asymmetric information, emphasizing cost-efficiency over traditional concerns about information rents. Using the virtual surplus framework, we derive a sharp, distribution-free condition for profitable versioning: a degraded product should be introduced if and only if its utility-to-cost ratio exceeds that of the full-featured version. We then examine settings with multiple low-end options and identify two sufficient conditions for optimal design. The firm prefers the more degraded product when it offers a superior cost-efficiency of utility reduction, and the less degraded one when it offers a better cost-efficiency of utility delivery.