Versioning Information Goods with Network Externalities

Positive externalities characterize the consumption of a majority class of information goods and services such as software, e-mail, and online content and services including virtual communities. We show that network externality is critical for the market segmentation and product line decisions of an information goods seller. With externality, a monopoly of multiple existing products offers exactly two distinct qualities. When development costs are taken into account, the low quality is developed only if the gain in revenue due to an enlarged network exceeds the extra development costs. In particular, if developed, the low quality should be offered for free under very general conditions. Network externality itself thus can explain the market provision of free information goods by proprietary sellers from a product line design perspective.