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

Abstract

The authors consider how a change in product form impacts the adoption decision for an innovative product based on digital technology. Examples of changes in product form often arise in products that feature indirect network externalities, such as MP3 players, PDAs and e-readers. Existing research suggests that, for innovations with indirect network externalities, the consumer's hardware adoption decision is influenced by the availability of complementary products. However, these studies of complementary products tend to focus on products that exist only as complementary products, such as DVDs, CDs, and video games. This research focuses on the case of an innovative hardware product that uses digital complementary products that compete with standalone versions of the same products. The authors argue that high levels of experience with a standalone product that competes with an innovative hardware/software bundle should increase the consumer's appreciation of (1) the utilitarian benefits of the hardware/software bundle and (2) the hedonic benefits of the standalone product, some of which may not be transferable to the electronic hardware. An analysis of data collected from 549 potential adopters of e-readers in Japan support these hypotheses. The findings have important implications for the design and marketing of digital innovations that involve a change in product form.