Internet Security, Vulnerability Disclosure, and Software Provision

In this paper, we examine how software vulnerabilities affect firms that sell software and consumers that purchase software. In particular, we model three decisions of the firm: (I) an upfront investment in the quality of the software to reduce potential vulnerabilities, (II) a policy decision whether to announce vulnerabilities, (III) and a price for the software. We also model two decisions of the consumer: (I) whether to purchase the software and (II) whether to apply a patch. 1 Choi: MSU, Fershtman: Tel Aviv University and CEPR, Gandal: Tel Aviv University and CEPR. We thank several anonymous reviewers from WEIS 2005 for their helpful comments. A research grant from Microsoft is gratefully acknowledged. Any opinions expressed are those of the authors.