Market Segmentation for Information Goods with Network Externalities

28 Pages Posted: 9 Oct 2008

See all articles by Bing Jing

Bing Jing

New York University (NYU) - Department of Information, Operations, and Management Sciences

Date Written: May 2003

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.

Keywords: Information Goods, Network Externality, Market Segmentation

Suggested Citation

Jing, Bing, Market Segmentation for Information Goods with Network Externalities (May 2003). Information Systems Working Papers Series, Vol. , pp. -, 2003. Available at SSRN: https://ssrn.com/abstract=1281325

Bing Jing (Contact Author)

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States
212-998-0822 (Phone)

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