The Effect Of Network Externality On The Pricing And Bussiness Model Selection Of Bussiness Firms

Network externality is an important feature of information goods. It indicates the fact that with the number of people using a product increases, everyone using this same product will gain a utility promotion. Network externality speaks for the information goods’collaborative value and some forms of it may be a better way to share contents, a compatible file, and a convenient way to interact with others. It can be seen that network externality directly enhances customers’ utility, so it is necessary to investigate the effect of network externality on products’prices, quality control and business model selection. The paper will analysis the problem from three aspects:product pricing, product quality control and information product providers’ business model selection.First, the paper examines the effects of network externality on pricing strategies of information goods with intrusion of piracy goods. Information goods providers can choose different quality of goods to control the piracy. When the quality is exogenous, the provider has three strategies for the pricing of information goods. Effects of the network externality on the pricing strategies and profit are investigated. When the quality is endogenous, the paper analyzes the effect of network externality on quality of information goods. Our findings show that small network externality has no impact on pricing strategy of the information goods. With large network externality, however, the information goods provider will lower the pricing for the intrusion of piracy goods in expenditure of a decrease profit caused by the large network externality. In addition, we also find that the information goods provider will lower the product quality when the network externality is small, and raise the quality when the network externality is large. Also, the paper analyzes the effects of network externality on consumer surplus and social welfare.Then, the paper investigates the effect of network externality on the information product providers’business model selection. First, the paper analysis the providers’optimal ad amount and profit under user-pay model, ads model and mix model when users are network externality homogeneous. Then, the paper analysis the providers’optimal ad amount and profit under three business models when users are network externality heterogeneous. Finally, the paper discuss the providers’business model selection. It turns out that when the product’s network externality increases, when choosing the user-pay model, the provider get a better profit, however when the users are network externality heterogeneous, the profit depends on the lowest network externality. When choosing the ads model, the provider offers more ads and gains a better profit, and both depend on the lowest network externality when it is heterogeneous. When choosing mix model, the provider’s profit depends on the product quality and the ad fee per unit. It also finds that when the network externality and the quality are both small, the provider’s best business model is ads model and when the network externality is small but quality is greater, best business model is user-pay model.Finally, the paper analysis the effect of network externality on the information product providers’business model selection in a fully competition market setting. First, the paper analysis the provider’s best business model when facing an ad-sponsored entrant. Then the paper discuss the business model selection when the provider faces a full competitive company. Finally the paper tries to find the Nash Equilibrium between the two information goods’ providers. The paper finds that the provider is always prefer to fight the ad-sponsored entrant by user-pay model or ads model. And when the network externality is medium, the provider chooses the ads model; when the network externality is large, the provider chooses the user-pay model. The paper also proves that the network externality enhances the profit in both models. And the Nash Equilibrium are {user-pay model, ads model} and{ads model, mix model}.