Versioning Strategy of Information Goods with Network Externality in the Presence of Piracy

In our model, market consists of two types of consumers who receive some common utility from the basic functionality of the information good but have heterogeneous valuation for other value enhancing functionalities. We show that in absence of piracy, versioning is optimal when the proportion of high valuation consumers is neither too large nor too small. In the presence of piracy, when the cost of piracy is too low for the lower valuation consumers, the information good provider offers only high quality product. Presence of network effect makes versioning strategy less likely to be optimal for the provider.