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Market Segmentation for Information Goods with Network Externalities

Authors: Jing, Bing
Keywords: Information Goods;Network Externality;Market Segmentation
Issue Date: 30-May-2003
Publisher: Stern School of Business, New York University
Series/Report no.: CeDER-05-25
Abstract: Positive externalities characterize the consumption of a majority of information goods such as software, various Internet services, and online communities. In a simple model of vertical differentiation, we show that network externality is a critical factor for the versioning of such information goods. In particular, a multi-product monopolist offers two versions of distinct qualities. The underlying rationale is that offering the low-end version expands the network size and thus enhances the (network) value of the high-end version, allowing the firm to charge a higher price for the high-end version. In addition, we show that the low-quality version may be offered for free under very general conditions. Competition between firms producing compatible products reduces their incentive to version their products due to the spillover effects in a shared product network.
Appears in Collections:CeDER Working Papers
IOMS: Information Systems Working Papers

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