L12 - Monopoly; Monopolization StrategiesReturn

This paper analyses the monopolist's production and pricing decisions on two vertically diffe-rentiated versions of a product in the presence of network externality. We show that offering only the higher-quality version of the product is the optimal strategy when negative externality exists and the utility from joint purchase is not large. If both versions are provided, the monopolist will charge a monopoly price for each version to induce separate purchases if these two versions are too close substitutes. Moreover, in the equilibrium with joint purchases, with an increase in externality or the utility from a joint purchase, the prices of both versions increase. In addition, with an in-crease in network externality, the equilibrium region for separate purchases first increases and then decreases.

In the present paper, we develop a monopoly model of vertical product differentiation for analysing the monopolist's decision about the possibility of versioning goods as substitutes or complements when consumers can buy them simultaneously. In this context, we find that versioning goods as substitutes or complements is optimal for the monopolist if the cost of designing the bundle (the purchase of one unit of each version) is increasing, which implies that making variants of closer substitutes reduces costs. However, if making variants of closer substitutes is costly, the monopolist versions goods as complements only. The final result also depends on the degree of concavity and convexity of the cost function.