Some dial-up Internet access providers, such as the market leader America OnLine (AOL), require customers to install proprietary connection software to use their service. This is puzzling, because while the software helps certain users, it creates disutility for others (especially expert users and early adopters of Internet service). Why, then, does AOL insist on this connection manager? Why not also offer a standardized service with Internet access and AOL-managed service to the power users?

This paper by Professor Hemant Bhargava and co-author Juan Feng of the University of Florida postulates that AOL wants to limit sales to unprofitable customers such as IT-savvy expert users. In the absence of other viable mechanisms for screening out such customers, AOL’s product design may be viewed as a smart approach to solve the adverse selection problem: the connection manager reduces valuations of IT-savvy users, making the service unattractive to them. A second possibility is that AOL considers IT-savvy users undesirable because their presence might cause novice users to learn to manage without AOL’s proprietary software; these customers might switch to the cheaper access-only option in future periods.