In a vertical product differentiation model , firms first simultaneously choose their qualities , and then choose output . We discuss and compare the equilibrium degree of quality differentiation , quantity and return under the assumption of increasing and decreasing return of scale with network externality. The study shows that the prod2 uct quality under decreasing returns is lower than that under increasing returns without network externality ; but with network externality the quality of high-quality product under decreasing returns is higher than the one with increasing returns. The market demand under decreasing returns is lower than that under increasing returns , that is indepen2 dent of the network externality.