Optimal product strategies in the presence of network externalities

The possibility that a software firm may exploit network externalities by introducing a limited feature version of its commercially available software into the market is examined.

Abstract

A network externality exists when a user's benefit from a product increases with the number of other users in the same network. We examine the possibility that a software firm may exploit network externalities by introducing a limited feature version of its commercially available software into the market. The two versions need not be perfectly compatible and network externalities are allowed to decline as the difference between the versions increases. We obtain conditions under which introducing a limited feature version is optimal.