Th is paper analyzes a two2stage ho rizon tal differen t iat ion modelw ith netwo rk ex ternality. U nder duopo ly st ructu re, the ex istence of netwo rk ex ternality no t on ly increases con sum ers’ w illingness of buying, bu t in ten sif ies compet it ion betw een f irm s as w ell. The subgam e perfect N ash equ ilib rium is compared w ith that in quadrat ic t ran spo rtat ion co st Ho telling model. F irm s adop t the p rincip le of m ax im um differen t iat ion w hen netwo rk ex ternality is no t too large. F irm s’ p rof it s and p rices decrease w ith netwo rk ex ternality, w hereas con sum er su rp lu s and social net w elfare imp rove. The duopo ly st ructu re canno t ex ist w hen netwo rk ex ternality is too large. U nder monopo ly st ructu re w ith netwo rk ex ternality, social net w elfare imp roves ow ing to h igh p rof it of monopo list, w hereas con sum er su rp lu s rem ain s unchanged.