Abstract
The proliferation of information technologies made it possible to produce information products of different versions at much lower cost comparing to traditional physical products. Thus it is common for information product manufacturers to consider vertically differentiated product line for more profit through improved market coverage. Another salient characteristic of most information product is network externality. Existing researches dealing with vertical differentiation and network externality usually assumed oligopolistic market where vertically differentiated products are provided by competing companies, respectively. Moreover, they analyzed the essentially dynamic characteristic of network externality statically. In this study, different from the previous researches, the vertical differentiation strategy of a monopolistic company under network externality is dynamically analyzed. We used a two-period model to accommodate the dynamic feature of network externality. Based on the two-period model, the profit maximizing solutions are analyzed. The results showed that a monopolistic company has no incentive to differentiate products vertically when the network externality is absent. On the contrary, when the network externality exists, the monopolistic company can derive more profit by vertically differentiating the product line. It is also shown that, for more profit, the monopolistic company should keep the quality difference between the high quality product and the low quality product as greater as possible.
