Versioning Goods and Joint Purchases with Network Externality

Abstract

This paper analyses the monopolist’s production and pricing decisions on two vertically differentiated versions of a product in the presence of network externality. We show that offering only the higher-quality version of the product is the optimal strategy when negative externality exists and the utility from joint purchase is not large. If both versions are provided, the monopolist will charge a monopoly price for each version to induce separate purchases if these two versions are too close substitutes. Moreover, in the equilibrium with joint purchases, with an increase in externality or the utility from a joint purchase, the prices of both versions increase. In addition, with an increase in network externality, the equilibrium region for separate purchases first increases and then decreases.