As discussed earlier, the level of fixed cost determines the price and quantity of the digital products produced. Here, a model that describes different choices in fixed investments is presented. This model also incorporates the critical issue of product differentiation, a decision that needs to be made at the initial stage of production. Because of the transmutability of digital products, the electronic marketplace is characterized by similar but different products. An economic motive for differentiation is the desire to minimize the effect of competition among identical products, which destroys the market due to the declining average cost of digital products. Thus, this model emphasizes the nature of multi-product production in electronic commerce. Pricing becomes more complex when a seller is faced with many similar but different products targeted at different segments of consumers. Our objective is to present some fundamental principles of multi-product pricing.
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