Optimal pricing non-homogeneous market with network externalities

The paper analyses the options open to monopoly firms that sell software or internet service. We consider customers who have different reservation prices that are rectangularly distributed. The monopoly in general undertakes sustainable price discrimination between customers by producing two versions of the product, basic and advanced, where a zero price is charged for the lower quality product (i.e., the free version). The monopoly may also sell advertising space to increase revenues but may lose those customers that are annoyed by being exposed to compulsory advertising. We analyse the situation where the monopoly has an incentive to increase consistently its output due to the network externality and allow sustained free of charge basic service.