Journal of Korean Society of Industrial and Systems Engineering (산업경영시스템학회지)

Society of Korea Industrial and System Engineering (한국산업경영시스템학회)
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Analysis of Compatibility Strategy between Vertically Differentiated Products under Network Externality

망외부성이 존재하고 수직적으로 차별화된 제품 간의 호환성 전략 분석

  • Cho, Hyung-Rae (Dept. of Industrial Systems Engineering/ERI, Gyeongsang National University) ;
  • Rhee, Minho (Dept. of Industrial Systems Engineering/ERI, Gyeongsang National University)
  • 조형래 (경상대학교 공과대학 산업시스템공학부/공학연구원) ;
  • 이민호 (경상대학교 공과대학 산업시스템공학부/공학연구원)
  • Received : 2019.11.25
  • Accepted : 2020.03.20
  • Published : 2020.03.31
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Abstract

It is a general phenomenon for manufacturers to provide vertically differentiated product line for more profit through improved market coverage. For such manufacturers, the compatibility between vertically differentiated products is an important decision issue. Some manufacturers provide full compatibility between high and low version products, whereas some provide only downward compatibility for the purpose of recommending high version product. In this study, the two representative compatibility strategies, full or downward, between vertically differentiated products produced by a single manufacturer are analyzed, especially under network externality and in the viewpoint of profit maximization. To do this we used a market model which captures the basic essence of vertical differentiation and network externality. Based on the proposed market model, the profit maximizing solutions are derived and numerically analyzed. The results can be summarized as follows : (1) Regardless of compatibility strategy, under network externality, vertical differentiation is always advantageous in terms of profit. (2) The full compatibility strategy is shown to be the most advantageous in terms of profit. In addition, it is necessary to make quality difference between differentiated products as wide as possible to maximize profit. (3) To gradually drive low version product out of the market and shift the weight pendulum of market to high version product, it is shown that the downward compatibility strategy is essential. Unlike intuition, however, it is also shown that in order to drive low version product out of market, it is necessary to raise the quality of the low version product rather than to lower it.

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References

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