Indirect network effects and the quality dimension: A look at the gaming industry

Abstract

a b s t r a c t JEL classification: L14 L82 M21 Keywords: Network effects Superstar software Game console Killer applicationsTwo-sided markets consist of platforms that need to bring both retail consumers and complementary goods producers on board to be successful. Consumer adoption of these platforms can often hinge on the presence and magnitude of indirect network effects -the positive feedback loop where a larger base of adopters of a primary product ("hardware") creates a larger market for complementary goods ("software"), which in turn increases the value of the primary good. Prior work attempting to measure indirect network effects often uses aggregate counts of software variety to do so. In this paper, we illustrate the importance of accounting for variation in software quality -a feature present in many markets -when conducting this measurement, and provide the conditions under which not doing so results in over-or underestimation of the actual indirect network effect. We apply our framework to the 7th-generation video game console market with quality-differentiated titles and show that in this market the use of aggregate software measures underestimates the indirect network effects by approximately 30%.

Winner-Takes-All or Co-Evolution among Platform Ecosystems: A Look at the Competitive and Symbiotic Actions of Complementors

“…This organizational learning influences innovation and performance [53]. The quality of complementary goods influences the strength of the indirect network effects on consumers' platform adoption [54] and is deemed by consumers to reflect the quality of the platform [55]. Thus, platform providers need complementors that have gained experience drawn from organizational learning in the market and that can develop superior complementary goods.…”

The Adoption of Electronic Innovations with Indirect Network Externalities that Compete with Standalone Physical Products

“…Recent studies have criticized earlier research that examined demand-side effects without controlling for the endogeneity of title availability (e.g., Dubé, Hitsch & Chintagunta, 2010;Gretz, 2010;Inceoglu & Park, 2011;Zhu & Iansiti, 2012;Kim, Prince & Qiu, 2014). In a reanalysis of the data from nine consumer electronic product categories, Stremersch et al (2007) compared the relative importance of the supply and demand effects.…”

“…They concluded that software availability typically followed hardware sales, while 'the reverse almost never happens' (Stremersch et al, 2007, p. 68). However, more recent studies focusing on specific categories have found evidence supporting the existence of demand effects in the markets for home video games (e.g., Corts & Lederman, 2009;Dubé, Hitsch & Chintagunta, 2010;Gretz, 2010;Zhu & Iansiti, 2012;Kim, Prince & Qiu, 2014) and DVD players (e.g., Inceoglu & Park, 2011).…”

“…For example, studies of the video game industry have explored INE effects within the context of competing hardware systems, both within and across technological generations (e.g., Shankar & Bayus;Corts & Lederman, 2009;Zhu & Iansiti, 2012;Kim, Prince & Qiu, 2014). For example, studies of the video game industry have explored INE effects within the context of competing hardware systems, both within and across technological generations (e.g., Shankar & Bayus;Corts & Lederman, 2009;Zhu & Iansiti, 2012;Kim, Prince & Qiu, 2014).…”

“…More recent research has analysed the impact of cross-platform compatibility and software quality on the magnitude of indirect network externalities (e.g., Binken & Stremersch, 2009;Corts & Lederman, 2009;Zhu & Iansiti, 2012;Kim, Prince & Qiu, 2014). Similarly, studies of video game hardware have examined competition within or across generations of hardware technology (e.g., Shankar & Bayus, 2003;Corts & Lederman, 2009;Zhu & Iansiti, 2012;Kim, Prince & Qiu, 2014). For example, studies of DVD players have examined either the competition among DVD players or the competition between DVD players and VCR players (e.g., Redmond, 1991;Ohashi, 2003).…”