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Functional Quality Degradation of Software with Network Externalities

Listed author(s):
  • Jong-Hee Hahn


    (Department of Economics University of Keele)

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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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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