Indirect Network Effects in New Product Growth

Abstract

AND KEYWORDS AbstractIndirect network effects are of prime interest to marketers because they affect the growth and takeoff of software availability for, and hardware sales of, a new product. While prior work on indirect network effects in the economics and marketing literature is valuable, these literatures show two main shortcomings. First, empirical analysis of indirect network effects is rare. Second, in contrast to the importance the prior literature credits to the chicken-and-egg paradox in these markets, the temporal pattern -which leads which? -of indirect network effects remains unstudied. Based on empirical evidence of nine markets, this study shows, among others, that:(1) indirect network effects, as commonly operationalized by prior literature, are weaker than expected from prior literature; (2) in most markets we examined, hardware sales leads software availability, while the reverse almost never happens, contradicting existing beliefs. These findings are supported by multiple methods, such as takeoff and time series analyses, and fit with the histories of the markets we studied. Indirect Network Effects in New Product Growth AbstractIndirect network effects are of prime interest to marketers because they affect the growth and takeoff of software availability for, and hardware sales of, a new product. While prior work on indirect network effects in the economics and marketing literature is valuable, these literatures show two main shortcomings. First, empirical analysis of indirect network effects is rare. Second, in contrast to the importance the prior literature credits to the chicken-and-egg paradox in these markets, the temporal pattern -which leads which? -of indirect network effects remains unstudied. Based on empirical evidence of nine markets, this study shows, among others, that: (1) indirect network effects, as commonly operationalized by prior literature, are weaker than expected from prior literature; (2) in most markets we examined, hardware sales leads software availability, while the reverse almost never happens, contradicting existing beliefs. These findings are supported by multiple methods, such as takeoff and time series analyses, and fit with the histories of the markets we studied. The findings have important implications for academia, public policy and management practice. To academia, it identifies a need for new, and more relevant, conceptualizations of indirect network effects. To public policy, it questions the need for intervention in network markets. To management practice, it downplays the importance of the availability of a large library of software for hardware technology to be successful.

The chilling effects of network externalities

“…See Birke (2008), Farrell & Klemperer (2006) and Shy (2001) for reviews of economics and Stremersch (2007) for marketing literature. This dynamic setting contrasts with earlier work in economics that emphasized the state of equilibrium in network markets rather than the dynamic path toward that state (Economides, 1996;Esser & Leruth, 1988;Laffont, Rey & Tirole, 1998;Rohlfs, 1974).…”

Does new product growth accelerate across technology generations?

“…At a certain point in time, it breaks into rapid growth often marked by extremely high growth rates as high as 300-400%. We call this point the takeoff, following Golder and Tellis (1997), Stremersch et al (2007), Tellis et al (2003), and Van Everdingen et al (2009). The takeoff is often regarded as the point at which the life cycle of a new product makes a transition from the introduction stage to the growth stage (Golder andTellis 1997, 2004).…”

Platform Launch Strategies

“…General empirical evidence for the existence of significant cross-side network effects has been verified, for instance, in the market for yellow pages (Rysman 2004), in the television-advertising industry (Wilbur 2008), and in the personal computer industry (Stremersch et al 2007). Ackerberg and Gowrisankaran (2006) estimated the size and importance of cross-side network effects in the banking industry and found that in the case of high adoption costs for potential users, MSPs need to offer appropriate incentives to ensure that they reach the critical user mass.…”