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Functional Quality Degradation of Software with Network Externalities

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Author Info

  • Jong-Hee Hahn

    () (Department of Economics University of Keele)

Abstract

This paper considers a functional quality degradation of software with twoway features (such as reading and writing in word-processors). A software monopolist differentiates products by introducing a functionally down-graded version (e.g. the read-only version) by eliminating some functions of the full version. A simple two-type model is presented to explain the firm’s incentive to introduce a functionally down-graded version. It is shown that the functional quality degradation is an effective consumer screening device, especially when consumers’ valuation for each function is negatively correlated. With network externalities, the firm may wish to offer the down-graded good below cost or even free of charge in many cases (including the case where introducing the quality-degraded version does not involve a market expansion). The welfare consequence of this kind of quality degradation is generally ambiguous, and critically depends on how the total market size changes by the introduction of the quality-degraded version.

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File URL: http://www.keele.ac.uk/depts/ec/wpapers/0012.pdf
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Bibliographic Info

Paper provided by Department of Economics, Keele University in its series Keele Department of Economics Discussion Papers (1995-2001) with number 2000/12.

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Length: 20 pages
Date of creation: 2000
Date of revision: Jan 2001
Publication status: Published in Journal of Industrial Economics, Volume 54, Issue 2, June 2006, pages 253-268 (revised version with G. Csorba). [ doi:10.1111/j.1467-6451.2006.00282.x ]
Handle: RePEc:kee:keeldp:2000/12

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Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
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Web page: http://www.keele.ac.uk/depts/ec/cer/
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Postal: Department of Economics, Keele University, Keele, Staffordshire ST5 5BG - United Kingdom
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Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

Related research

Keywords: Software; Network Externalities; Quality Differentiation; FunctionalDegradation.;

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References

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  1. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
  2. Nicholas Economides, 1997. "The Economics of Networks," Industrial Organization 9701002, EconWPA.
  3. Takeyama, Lisa N, 1994. "The Welfare Implications of Unauthorized Reproduction of Intellectual Property in the Presence of Demand Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 155-66, June.
  4. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 475-98, August.
  5. Kathleen Reavis Conner & Richard P. Rumelt, 1991. "Software Piracy: An Analysis of Protection Strategies," Management Science, INFORMS, vol. 37(2), pages 125-139, February.
  6. McAfee, R Preston & McMillan, John & Whinston, Michael D, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 371-83, May.
  7. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  8. Luis Cabral & David Salant & Glenn Woroch, 1994. "Monopoly Pricing With Network Externalities," Industrial Organization 9411003, EconWPA.
  9. repec:att:wimass:9508 is not listed on IDEAS
  10. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, 06.
  11. Choi, Jay Pil, 1994. "Network Externality, Compatibility Choice, and Planned Obsolescence," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 167-82, June.
  12. Bensaid, Bernard & Lesne, Jean-Philippe, 1996. "Dynamic monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 837-855, October.
  13. Shmuel S. Oren & Stephen A. Smith & Robert B. Wilson, 1982. "Nonlinear Pricing in Markets with Interdependent Demand," Marketing Science, INFORMS, vol. 1(3), pages 287-313.
  14. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  15. repec:fth:coluec:564 is not listed on IDEAS
  16. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
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Citations

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Cited by:
  1. Jong-Hee Hahn, 2002. "Damaged Durable Goods," Industrial Organization 0211010, EconWPA.
  2. Haruvy, Ernan & Prasad, Ashutosh, 2005. "Freeware as a competitive deterrent," Information Economics and Policy, Elsevier, vol. 17(4), pages 513-534, October.
  3. Hahn, Jong-Hee, 2003. "Nonlinear pricing of telecommunications with call and network externalities," International Journal of Industrial Organization, Elsevier, vol. 21(7), pages 949-967, September.
  4. Alexandre Gaudeul, 2004. "Shareware competition: Selling an experience," Game Theory and Information 0409008, EconWPA.
  5. Martin Peitz & Patrick Waelbroeck, 2003. "Piracy of Digital Products: A Critical Review of the Economics Literature," CESifo Working Paper Series 1071, CESifo Group Munich.

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