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The DVD-vs.-DIVX Standard War: Empirical Evidence of Network Effects and Preannouncement Effects
Abstract
We test empirically for network effects and preannouncement effects in the DVD market. We do this by measuring the effect of potential (incompatible) competition on a network undergoing growth. We find that there are network effects. The data are generally consistent with the hypothesis that the preannouncement of DIVX temporarily slowed down the adoption of DVD technology.
... Despite the burgeoning research, however, the blind spot is the complementor: Few studies have explicitly investigated the ways in which to manage heterogeneous and strategic complementors for performance and competitive advantage (McIntyre and Srinivasan, 2017). For example, the widely held belief that once a critical mass of consumers or end users is on board a platform, most complementors will also support the platform (Armstrong, 2006;Armstrong and Wright, 2007;Hossain et al., 2011;Rochet and Tirole, 2006), is based on an overly simplistic view that positive indirect network effects alone determine the complementor support (Cottrell and Koput, 1998;Dranove and Gandal, 2003;Nair et al., 2004;Ohashi, 2003). However, the number of consumers on the platform makes it only more likely that the complementor can make a profit on the platform (Tucker and Zhang, 2010). ...
... An early mover can exploit its installed base of users through predatory pricing, thus increasing barriers to entry. However, the authors further demonstrated how a product preannouncement can be used to overcome installed base advantages (see also Dranove and Gandal, 2003;Nagard-Assayag and Manceau, 2001), but again with the potential social cost of excessive standardization. 15 A classic example of this latter type of market outcome is the victory of the late entrant VHS (JVC) over the technologically superior early entrant Betamax (Sony), although there might have been various reasons for the latter's demise (Cusumano, Mylonadis, and Rosenbloom, 1992;Ohashi, 2003;Park, 2004). ...
... Over the years, many more researchers have empirically documented the existence and importance of indirect network effects in explaining the performance and competitiveness of multi-sided platforms in a variety of settings (Basu, Mazumdar, and Raj, 2003;Binken and Stremersch, 2009;Clements and Ohashi, 2005;Corts and Lederman, 2009;Cottrell and Koput, 1998;Dranove and Gandal, 2003;Frels et al., 2003;Gandal, Kende, and Rob, 2000;Gupta et al., 1999;Kaiser and Wright, 2006;Landsman and Stremersch, 2011;Nair et al., 2004;Ohashi, 2003;Park, 2004;Rysman, 2004;Schilling, 2002;Stremersch et al., 2007;Tucker and Zhang, 2010;Venkatraman and Lee, 2004). The notion of indirect network effects helps to acknowledge the important market structural properties of multisided platforms: They consist of multiple distinctive market sides, such as complementors and consumers, interacting with each other through intermediaries (Rochet and Tirole, 2006). ...
Largely enabled by information and Internet technologies, we have recently witnessed
the rise of the platform-based business model, where multiple types of actors are brought
together to interact on a common multi-sided platform. Immensely successful platform
firms such as Apple (e.g., with iOS), Microsoft (e.g., with Windows and Xbox) and
Amazon.com (with the marketplace) continue to inspire strategic management scholars
and economists, who try to uncover the strategies that lead to such abnormal platform
performance and competitiveness. While the extensive focus on the platform has offered
useful implications for platform strategy, the resultant inattention to the inherent external
resource interdependencies between the platform and other platform-based market
participants (i.e., complementors and consumers) has hindered theoretical progress. In
particular, the analytical models of multi-sided platforms, which constitute the theoretical
core of platform literature, tend to assume homogeneity and perfect rationality of the
market participants, and further simplify their strategic interactions, limiting the empirical
validity and normative implications of the platform theory.
Therefore, I explore how micro-level strategic interactions between the platform-based
market participants affect platform performance and competitiveness, and hence platform
strategy. To do so, I use agent-based simulation that enables relaxing the unrealistic
assumptions of analytical models, and thus better highlight how heterogeneous and
bounded rational agents interact in platform-based markets. In addition to the individual
studies that offer a variety of models to capture the complex dynamic interactions, I
develop a further set of novel propositions that together illustrate the general argument
that moderate control over the complex adaptive system (i.e., the platform-based market)
improves platform performance and competitiveness. This is because devolving
complementary resource control to the third parties does not only enable the platform
owner to leverage demand-side economies of scale, as argued in the extant literature, but
devolving resource control may also spur opportunistic complementor and consumer
behavior that may at worst disrupt the platform (e.g., the classic case of Atari). Although
the contribution is largely conceptual, it also builds on empirical evidence in the literature
and that I provide. Finally, I make a minor methodological contribution to the study of
platforms, by illustrating the utility of agent-based simulation in studying these complex
adaptive systems, an endeavor that is the first of its kind.
... This empirical puzzle is interesting because received wisdom from theoretical and empirical research suggests that secrecy is often the mechanism that R&D-intensive firms choose to protect and capture value from their product innovations (Cohen, Nelson, & Walsh, 2000;Kultti, Takalo, & Toikka, 2007;Levin, Klevorick, Nelson, & Winter, 1987;Liebeskind, 1997). More recent research has shown that for firms that disclose, late-stage disclosures are the preferred type of disclosures (Dedman et al., 2008;Dedman, Mouselli, Shen, & Stark, 2009), which include information regarding the development stage of the innovation process (e.g., clinical trials for pharmaceutical firms; product development in the b testing phase for communications equipment firms), or information about new product launches to preempt product markets (Bayus, Jain, & Rao, 2001;Dranove & Gandal, 2003;Haan, 2003). However, we observe firms consistently making both early-and late-stage disclosures, and firms disclose well in advance of launching new product innovations. ...
... One such effort would be to mislead rivals to reduce competitive entry into product markets. For example, some firms in high-tech industries have been accused of preannouncing new products that currently do not exist and may never actually be released (i.e., vaporware) as a strategy to deter competitors from developing similar or substitute products (Bayus et al., 2001;Dranove & Gandal, 2003;Haan, 2003). Although there is evidence that this can be beneficial in temporarily dissuading competition (Dranove & Gandal, 2003), there are potentially negative demand effects (Haan, 2003) and backlash from investors or other key stakeholders (Bayus et al., 2001) that mitigate firms' incentives to falsely disclose. ...
... For example, some firms in high-tech industries have been accused of preannouncing new products that currently do not exist and may never actually be released (i.e., vaporware) as a strategy to deter competitors from developing similar or substitute products (Bayus et al., 2001;Dranove & Gandal, 2003;Haan, 2003). Although there is evidence that this can be beneficial in temporarily dissuading competition (Dranove & Gandal, 2003), there are potentially negative demand effects (Haan, 2003) and backlash from investors or other key stakeholders (Bayus et al., 2001) that mitigate firms' incentives to falsely disclose. Nevertheless, if disclosure is lacking in substance, we would expect disclosures not to be associated with firm attributes that indicate R&D strength or accomplishment (i.e., they would randomly map to these attributes). ...
By documenting empirical facts, we highlight the importance of voluntary public R&D disclosure and provide guidance for more refined theoretical and empirical treatments of this phenomenon going forward. Focusing on the disclosure of good news, we demonstrate the prevalence of public R&D disclosure; document its variation across industries, firms, and within firms over time; and conduct multivariate analyses to better understand this variation. Three key discoveries provide new insights that can help guide future research: (i) disclosure precedes observable R&D and performance outcomes—it appears to be more than reporting company accomplishments; (ii) increased disclosure is associated with adverse changes to R&D and performance outcomes—suggesting that firms manage negative outcomes by proactively disclosing good news; and (iii) although pharmaceutical firms disclose more than communications firms, the variance in disclosure is less related to R&D and performance outcomes.
... The network advantage of VHS was exactly an engine of tipping toward the VHS format that completely eliminated Beta standard from home video systems. Dranove/Gandal (2003) analyzed monthly data from the first month in which DVD players were available in April 1997 through June 2000 and test overall network effects as well as pre-announcement effects in the DVD market. In their OLS estimation, the authors found that pre-announcement of the rival DIVX standard set back DVD standard market growth by at least 20%. ...
... So they decided to play the "waiting game" which DIVX eventually lost. Dranove/Gandal (2003) estimate that this move by DVIX led to short-term increase in confidence, and eventually bust in DVD devices sales. ...
This paper reviews selected empirical literature most relevant to network economy. Our selection includes empirical studies assessing network effects and strategies in different sectors and industries. Since network effects-the increase in value of consuming a product if many consumers use the same product-are a feature of many markets and in particular of many high-technology products, we have tried to include a wide variety of empirical literature over the past decades and to make a user-friendly guide for future researches in this important field. Our intention is not to steer future researchers in any particular direction, but to emphasize the need for closer analysis of the consumer interactions and the decision-making process in network industries, as well as better understanding of how network effects operate.
... Besides, some scholars take "network externality" as an important factor for preannouncement strategy and examine the intrinsic relationship between network effect and NPP effect. For instance, Dranove and Gandal [10] find that there are network effects in the DVD preannouncement market by employing the empirical analysis method. Nagard-assayag and Manceau [21] study the diffusion and penetration of new products under the indirect network effects. ...
... Unlike Choi et al. [8], our studies show that the increase of network effect will reduce the power of platforms preannouncement. Unlike Nagard-assayag and Manceau [21], and Dranove and Gandal [10], who study the game relationship between consumer and platforms under the samesided network effect, our study focuses on the game relationship among consumers, developers and platforms under cross-network effect. ...
What message should be released to consumers and developers is an important part of the preannouncement strategy of platforms’ new product. From the perspectives of consumers and developers’ information perceptions, we develop a game model of two-sided market, which can better describe the impacts of information preannouncement on consumers, developers, and platforms behavior in a competitive environment. There are two preannouncement strategies: Technical or marketing information. Our studies reveal that (i) when the development capabilities are heterogeneous enough, both platforms release technical information; (ii) both platforms preannounce marketing information when the heterogeneity of development capability is sufficiently small, even if it decreases total social welfare; (iii) the platform lacking competitive advantage is more inclined to adopt a strategy different from the competitive advantage platform, and competitive advantage platform is likely to change the preannouncement strategy constantly; (iv) the heterogeneity of platforms is the prerequisite for the asymmetric equilibrium, even if it may decrease the overall social welfare.
... While theory suggests that software availability creates a positive effect on hardware sales, two sets of empirical studies with complementary findings have emerged. The first stream of literature focuses on the amount of available software in general and shows that a greater amount of available software increases hardware demand (Clements and Ohashi 2005;Dranove and Gandal 2003;Dubé et al. 2010;Gandal et al. 2000;Gretz and Basuroy 2013;Nair et al. 2004). A second stream of research examines the software-hardware demand link separately for different types of software. ...
... For a brief review of the literature, see Table 1. Several studies show that regardless of software quality, the amount of available software is an important determinant of hardware success, and that hardware installed base drives the amount of available software (e.g., Nair et al. (2004) in the personal digital assistant industry; Clements and Ohashi (2005), Dubé et al. (2010), and Gretz and Basuroy (2013) in the video game industry; Gandal et al. (2000) in the compact disc industry; Dranove and Gandal (2003) in the digital video disc industry). However, in a study spanning nine industries, Stremersch et al. (2007) find that hardware sales lead software sales but the reverse almost never happens. ...
In the context of two-sided markets, we propose hardware lifecycle as a key moderator of the impact of superstar and non-superstar software on hardware adoption. A hardware’s earlier adopters are less price sensitive and have a higher preference for exciting and challenging software. In contrast, later adopters are more price sensitive and prefer simplicity in software. Superstar software tend to be more expensive and more complex compared to non-superstars. Therefore, earlier (later) adopters prefer superstars (non-superstars), which leads to higher impact of superstars (non-superstars) on hardware adoption in the early (later) stages of the hardware lifecycle. Using monthly data over a 12-year timeframe (1995–2007) from the home video game industry, we find that both superstar and non-superstar software impact hardware demand, but they matter at different points in the hardware lifecycle. Superstars are most influential when hardware is new, and this influence declines as hardware ages. In contrast, non-superstar software has a positive impact on hardware demand later in the hardware lifecycle, and this impact increases with hardware age. Findings reveal that eventually the amount of available non-superstar software impacts hardware adoption more than the amount of available superstar software. We provide several managerial implications based on these findings.
... The network externality may also be negative, for example, if an Internet service provider becomes oversubscribed, its subscribers will suffer from the congestion externality. Network effects and the standard models for understanding them have been empirically validated in a variety of industries, including the markets for mobile phones [15], fixed broadband [16], personal digital assistants [17], DVDs [18], home video games [19], ATMs [20], and fax machines [21]. ...
... The total consumer surplus is then ∫ω Fig. 3 shows the NSP profit (2); price (12), (13), (17), (18), and (23); total consumer surplus (14), (19), and (24); and market share (6), (7), and (21) in the duopoly game, for various market parameters (ω,q). First, we note that our intuition of Section IV is validated: Fig. 3a and Fig. 3e show that resource sharing is less often profitable to both NSPs at the same time in mmWave networks than in microwave networks. ...
With the increasing interest in the use of millimeter wave bands for 5G cellular systems comes renewed interest in resource sharing. Properties of millimeter wave bands such as massive bandwidth, highly directional antennas, high penetration loss, and susceptibility to shadowing, suggest technical advantages to spectrum and infrastructure sharing in millimeter wave cellular networks. However, technical advantages do not necessarily translate to increased profit for service providers, or increased consumer surplus. In this paper, detailed network simulations are used to better understand the economic implications of resource sharing in a vertically differentiated duopoly market for cellular service. The results suggest that resource sharing is less often profitable for millimeter wave service providers compared to microwave cellular service providers, and does not necessarily increase consumer surplus.
... Betamax) or DVD (vs. DIVX) are other examples (Gandal (2002) and especially Dranove and Gandal (2001) provide more analysis of critical mass and tipping). Tipping in financial services occurs, for example, in trading systems where there are agglomeration advantages of concentration in liquidity. ...
... The winner-takes-all paradigm consists of the tendency of a single technology architecture to emerge as the dominant design [43]. Indeed, that is often the case as shown by the multitude of so-called standard wars in which a dominant platform design emerges as competitors are driven out of the market [44], [45], [46]. However, the winner-takes-all paradigm about platforms has come under scrutiny lately [47], [48]. ...
Scholarly interest in business platforms has risen consistently in the past 10 years. As a pervasive topic in the business literature, business platforms are addressed not only in the management field but also in domains, such as economics, strategy, marketing, engineering, and information technology. We provide a review of the literature on business platforms using a bibliometric methodology. In doing so, we extend the scope of research by including the closely related topic of business ecosystems. Bibliometric techniques allow consideration of a broad selection of papers with a consequent reduction in bias. We start with a selection of 1914 publications from 2009 to 2022. First, we identify the theoretical cornerstones employing cocitation analysis. This technique allows us to determine the fundamental literature, including documents that date back to previous decades. Then, we employ bibliographic coupling to determine the most recent research trends, limiting the span to the 2018–2022 period. Finally, we propose a research agenda based on the identified gaps in current research trends.
... In this vein, signaling to the platform's supply side can be understood as a way to govern activity on the platform (Rietveld et al. 2019;Tiwana 2014;Wareham et al. 2014). While past literature links signals indicating sustained use and adoption of a platform to network effects (e.g., Dranove and Gandal 2003), platform signals can also address the supply side of the platform by communicating with complementors. Platform operators are generally thought to regulate their marketplaces by means of deciding which transactions are enabled on the platform in the first place (Boudreau and Hagiu 2009). ...
... Innovation diffusion theories also offer several related hypotheses for organizational failure in data-intensive services. Aggregate or network-based diffusion theories have offered various explanations for how two products similar in their context and performance can have different diffusion outcomes (Dranove and Gandal, 2003;Greve and Seidel, 2015). Models of innovation diffusion in fact date back to Bass's (1969) seminal work on modeling market diffusion. ...
Service science theories do not fully explain failure cases in data‐intensive services – high‐technology services that utilize large volumes of data and provide customized information for users. In these service systems, the technological and social elements are highly interconnected: firms cannot maintain databases and analytic capabilities if they lack market penetration, which itself is influenced by performance of analytic capabilities and databases; a positive feedback loop. Informed by a case study, we develop a simulation model, postulate that market adoption is highly sensitive to the launch conditions, specifically with respect to the initial states of the system, and offer a dynamic theory in which highly nonlinear relationships among the initial states of the system drive outcomes of the market adoption of data‐intensive services. We argue that a tipping point exists at which small technological differences in the launch period differentiates between market success and failure. Furthermore, our analysis points to a strong self‐fulfilling mechanism whereby initial positive customer perception can increase the service's likelihood of success by indirectly influencing technological improvement. In contrast to the conventional belief, having a large number of initial adopters may negatively influence market adoption in the long run. A major source of the patterns observed is the high level of interdependencies between social and technological elements of data‐intensive services.
... One might worry about simultaneity in the determination of these outcomes and the paper uses the evolving cost of building a plant to produce disks as a shifter for the availability of titles. Dranove and Gandal (2003) analyze sales of DVD players during its competition with the DIVX standard. They allow sales of DVD players to depend on the number of titles available. ...
The chapter has ten sections, which cover the theory of two-sided markets and related empirical work. Section 1 introduces the reader to the literature. Section 2 covers the case of markets dominated by a single monopolistic firm. Section 3 discusses the theoretical literature on competition for the market, focusing on pricing strategies that firms may follow to prevent entry. Section 4 discusses pricing in markets in which multiple platforms are active and serve both sides. Section 5 presents alternative models of platform competition. Section 6 discusses richer matching protocols whereby platforms price-discriminate by granting access only to a subset of the participating agents from the other side and discusses the related literature on matching design. Section 7 discusses identification in empirical work. Section 8 presents approaches to estimation. Section 9 discusses estimation in empirical work. Finally, Section 10 concludes.
... Indirect network externalities affect diffusion processes through the effect on adopters' utility of the combined use of two complementary goods, such as MSN and Smartphones. Early studies identified the relevance of indirect network externalities 13 on systems such as application software and operating systems (Church & Gandal, 1992) and video players and DVDs (Dranove & Gandal, 2003). This paper focuses on indirect network externalities due to the systems composed by MSN and Smartphones. ...
The early diffusion of mobile social networking (MSN) reflected the interplay of different factors: the affordability of better Internet connectivity and the diffusion of Smartphones suitable for Social Networking Applications. These key technology and cost drivers facilitated both the direct and indirect network externalities, which
are necessary to overtake critical adoption barriers and facilitate users’ decisions. However, a key challenge in modelling MSN diffusion is in distinguishing among the impact of these two types of network externalities. This paper addresses such a challenge by adopting a two-stage estimation strategy. In the first stage, we focus on
direct network externalities by estimating a set of country-specific adoptions peaks that allow differentiating between early and late adopters. In the second stage, we estimate the impact of indirect network externalities on MSN diffusion while also considering the role of pricing strategies. Our results provide significant evidence
that indirect network externalities can exert opposite effects on adoption between early adopters and followers, depending on whether they adopt before or after a country’s MSN diffusion peak.
... Indirect network externalities affect diffusion processes through the effect on adopters' utility of the combined use of two complementary goods, such as MSN and Smartphones. Early studies identified the relevance of indirect network externalities 13 on systems such as application software and operating systems (Church & Gandal, 1992) and video players and DVDs (Dranove & Gandal, 2003). This paper focuses on indirect network externalities due to the systems composed by MSN and Smartphones. ...
The early diffusion of mobile social networking (MSN) reflected the interplay of different factors: the affordability of better Internet connectivity and the diffusion of Smartphones suitable for Social Networking Applications. These key technology and cost drivers facilitated both the direct and indirect network externalities, which are necessary to overtake critical adoption barriers and facilitate users' decisions. However, a key challenge in modeling MSN diffusion is in distinguishing among the impact of these two types of network externalities. This paper addresses such a challenge by adopting a two-stage estimation strategy. In the first stage, we focus on direct network externalities by estimating a set of country-specific adoptions peaks that allow differentiating between early and late adopters. In the second stage, we estimate the impact of indirect network externalities on MSN diffusion while also considering the role of pricing strategies. Our results provide significant evidence that indirect network externalities can exert opposite effects on adoption between early adopters and followers, depending on whether they adopt before or after a country's MSN diffusion peak.
... An increase in the population of VHS adopters led to an increase in the utility of VHS, with the movie industry and rental chains offering a wider selection of titles (Ohashi, 2003). Analogous cases include the DVD, the Blu-ray Disc, online social networks, or peer-to-peer file sharing (Dranove and Gandal, 2003;Lin and Kulatilaka, 2006;Salek et al., 2010;Wang, 2010). ...
The present study investigates the standardization process of contact tracing apps during the COVID‐19 pandemic. Due to the epidemiological urgency, and differing from classical examples in the literature, this process is characterized by a compressed timeframe. In this setting, we investigate the role of different standard‐setting modes and their interaction through the lens of multi‐mode standardization. We find that the processes of standard setting through market competition or inclusive multi‐stakeholder committees proved time‐consuming and inefficient in addressing the immediate needs during this major global health crisis. Multi‐mode standardization between committees, market players, and governments equally proved unable to coordinate a standard. Ultimately, a so far neglected actor, namely platform owners, proved to be pivotal in coordinating a widely‐adopted standard. Our research extends multi‐mode standardization with platform owners as a further standardization actor of proliferating importance given the increasing pervasiveness of platforms in numerous contexts. The present article provides implications for the interplay between different modes of standard setting in general, and the setting of technological standards in crises in particular.
... Platform leaders have used industry and mass-media publications, social media, and even their association with reputed technical organizations to promote themselves (Veisdal, 2020). Platform leaders can also pre-announce their services and product launches before their actual launch to generate favourable expectations (Dranove & Gandal, 2003). The platform entrant may also need to develop the application or content themselves as a first-party provider (Veisdal, 2020) to demonstrate the platform's attractiveness to prospective complementors so that they invest in next-generation technologies. ...
The successful emergence of a disruptive platform in a contested industry is fraught with many challenges. The extant literature focuses on the challenges faced by the established platforms or the growth and inception of regular platforms, highlighting the need for understanding the dilemmas faced by a entrant disruptive platform. Our study sheds light on this phenomenon in an exploratory in-depth case study analysing the emergence of Jio Platform, an India based green-field platform providing mobile and digital services. Our analysis charts the disruptor's actions to navigate challenges posed by the incumbents and its own advanced technology. We demonstrate that the disruptive entrant initiated three strategic actions to overcome its ‘disruptor’s dilemma’: active market development for complement products, using strong complementors as force multipliers and effective usage of framing to secure legitimacy and support. The analysis also highlights how the strategy adopted by Jio evolved over time, as well as the difficulties of mapping this onto the existing understanding of the literature. By focusing on the intersection of the platform and disruptive innovation literature we identify managerial implications and a source of propositions for researchers, investigating the growth of the disruptive platform and its impact on the ecosystem.
... and misleading statements about installed base size and market share (Dranove & Gandal, 2003;Farrell & Saloner, 1986;Le Nagard-Assayag & Manceau, 2001;Schilling, 2003). ...
Over the past three decades, platform competition—the competition between firms that facilitate transactions and govern interactions between two or more distinct user groups who are connected via an indirect network—has attracted significant interest from the fields of management and organizations, information systems, economics, and marketing. Despite common interests in research questions, methodologies, and empirical contexts by scholars from across these fields, the literature has developed mostly in isolated fashion. This article offers a systematic and interdisciplinary review of the literature on platform competition by analyzing a sample of 333 articles published between 1985 and 2019. The review contributes by (a) documenting how the literature on platform competition has evolved; (b) outlining four themes of shared scholarly interest, including how network effects generate “winner-takes-all” dynamics that influence strategies, such as pricing and quality; how network externalities and platform strategy interact with corporate-level decisions, such as vertical integration or diversification into complementary goods; how heterogeneity in the platform and its users influences platform dynamics; and how the platform “hub” orchestrates value creation and capture in the overall ecosystem; and (c) highlighting several areas for future research. The review aims to facilitate a broader understanding of the platform competition research that helps to advance our knowledge of how platforms compete to create and capture value.
... and misleading statements about installed base size and market share (Dranove & Gandal, 2003;Farrell & Saloner, 1986;Le Nagard-Assayag & Manceau, 2001;Schilling, 2003). ...
Over the past three decades, platform competition—the competition between firms that facilitate transactions and govern interactions between two or more distinct user groups who are connected via an indirect network—has attracted significant interest from the fields of management and organizations, information systems, economics, and marketing. Despite common interests in research questions, methodologies, and empirical contexts by scholars from across these fields, the literature has developed mostly in isolated fashion. This article offers a systematic and interdisciplinary review of the literature on platform competition by analyzing a sample of 333 articles published between 1985 and 2019. The review contributes by (a) documenting how the literature on platform competition has evolved; (b) outlining four themes of shared scholarly interest, including how network effects generate “winner-takes-all” dynamics that influence strategies, such as pricing and quality; how network externalities and platform strategy interact with corporate-level decisions, such as vertical integration or diversification into complementary goods; how heterogeneity in the platform and its users influences platform dynamics; and how the platform “hub” orchestrates value creation and capture in the overall ecosystem; and (c) highlighting several areas for future research. The review aims to facilitate a broader understanding of the platform competition research that helps to advance our knowledge of how platforms compete to create and capture value.
... 3) the availability of complementary goods for the standards [109]; 4) flexibility or the extent to which the standards can be adapted to changing requirements [133]. Standards competition strategies include the following: 1) low pricing strategy to quickly increase the installed base [73]; 2) appropriability strategy, i.e., the extent of standards openness to adoption and development from other firms [6], [51], [62], [65], [103]; 3) market entry timing [84]; 4) marketing and communications, e.g., preannouncements of new version releases [43]; 5) pre-emption of scarce assets to deny competitor access to them [14]; 6) expand the distribution network of standards and accelerate their diffusion [140]; 7) increase the stakeholder commitment to standards development and promotion [126]. The other stakeholders category includes the following: 1) the installed base of current and previous standards versions [50]; ...
Standards competition is a complicated process influenced by a large number of factors and mechanisms. This article develops a simulation model that draws on current theory of standards competition dynamics and represents the interplay of strategic factors that firms can use to gain a competitive advantage. The model is used to reproduce four published cases of standards competition and explore alternative outcomes. Simulation results align with the published cases and show that the competition outcome arises from the systemic effect of all the factors identified in the original studies. Further simulation tests explore under which conditions competition outcomes could have been different. The model, thus, provides a basis for further theoretical and empirical work on strategic aspects of standards competition in the respective industries of the cases.
... Network effects were studied in the context of the use of long-distance telephony in the 1970s and have been widely recognised as a critical aspect of industrial organisation in IT industries, although they are widespread in other fields, including mobiles, microchips, telecommunication, PCs, semiconductors, e-commerce and electronic marketplaces. Empirical evidence on network effects has been found in product categories as diverse as spreadsheets [57], databases [58] and DVD players [59]. In a two-sided market, in which a particular type of network externality is present [26], the externalities do not exist between users belonging to the same group because, in a two-sided market, both direct and indirect network effects are generated by the consumption behaviour of users belonging to many different groups. ...
As the platform business becomes more important, it is crucial to make adequate decisions and choices for strategies, considering influence factors in relation to the platform for each growth model. This study researched how to build a platform business in the IT industry from the perspective of a dynamic approach to understand how the platform growth model successfully enables business entities to enter the market and to continue expansion. Through 21 case studies, this research formulated the four stages of platform growth model: entry, growth, expansion and maturity, providing a conceptual framework to build a platform growth model ecosystem.
... Yoffie (1997) points out that nowadays network effects have become more significant in many industries, including the computer hardware industry, the consumer electronics industry, and the telecommunications industry. Several studies find strong network effects in many markets (e.g., Blundell et al. 1999;Dranove and Gandal 2003;Ohashi 2003;Nair et al. 2004;Grajek 2010). For instance, Grajek (2010) indicates that ignoring network effects can lead to overestimation of demand elasticity. ...
We consider network effects in the monopolistically competitive model of trade developed by Melitz and Ottaviano (2008). We show that a larger network effect intensifies competition by allowing more‐productive firms to raise prices and earn higher profits, but forcing less‐productive firms to reduce prices and earn lower profits. As a result, low‐productivity firms are driven out of the market. We also show that when network effects are asymmetric, it may be difficult for firms from a country with a small network effect to compete with firms from a country with a large network effect.
... As such, the NPP literature may be approached from the point-ofview of the signal sender, the receiver, and the market conditions that influence how receivers perceive and respond to signals. From the sender's perspective, past studies have examined the motivations of firms to preannounce, for instance, with the aim to deter entry into a particular industry (Bayus et al., 2001;Ofek & Turut, 2013), to help establish industry standards (Dranove & Gandal, 2003), or to influence the diffusion of a new technology (Farrell & Saloner, 1986). ...
Although firms widely use product preannouncements as a signaling strategy to influence external audiences' perceptions and decisions, environmental scholars have rarely investigated this medium as a legitimation strategy. This study explores the impact of environmental performance on firms' propensity to use symbolic green new product preannouncements to signal their green actions. Building on a sample of 503 green product preannouncements from 2008 to 2012, the findings show that firms with lower environmental performance tend to issue more symbolic green preannouncements. We also found that the level of concentration in the industry moderates the relationship between environmental performance and symbolic green preannouncements, such that firms tend to issue more symbolic preannouncements in highly concentrated industries independently of their environmental performance to deter-or respond to competitive signals. This study contributes to the environmental literature by unraveling the determinants of symbolic green product preannouncements.
Link to article below:
https://authors.elsevier.com/a/1ZIOB3ISCV6D2M
... This behavior can, in turn, create a virtuous cycle for the leading (majority) formats and helps the strong grow stronger (Shapiro and Varian 1999). This type of market evolution has been documented in the VHS and Betamax "standards competition" (Cusumano et al. 1992;Park 2004), the adoption of the DVD format (Dranove and Gandal 2003), and in the markets for U.S. desktop operating systems and office productivity software (Bresnahan 2001;Brynjolfsson and Kemerer 1996). ...
Both theoretical and empirical evidence suggest that, in many markets with standards competition, network effects make the strong grow stronger and can “tip” the market toward a single, winner-take-all standard. We hypothesize, however, that low cost digital conversion technologies, which facilitate easy compatibility across competing standards, may reduce the strength of these network effects. We empirically test our hypotheses in the context of the digital flash memory card market. We first test for the presence of network effects in this market and find that network effects, as measured here, are associated with a significant positive price premium for leading flash memory card formats. We then find that the availability of digital converters reduces the price premium of the leading flash card formats and reduces the overall concentration in the flash memory market. Thus, our results suggest that, in the presence of low cost conversion technologies and digital content, the probability of market dominance can be lessened to the point where multiple, otherwise incompatible, standards are viable. Our conclusion that the presence of converters weakens network effects implies that producers of non-dominant digital goods standards benefit from the provision of conversion technology. Our analysis thus aids managers seeking to understand the impact of converters on market outcomes, and contributes to the existing literature on network effects by providing new insights into how conversion technologies can affect pricing strategies in these increasingly important digital settings.
... The canonical example of this type of network effect is in the case of gaming platforms, where the demand for a console increases with the number of video game titles available (Cennamo & Santalo, 2013;Clements & Ohashi, 2005;Corts & Lederman, 2009;Shankar & Bayus, 2003). Studies have also examined indirect network effects in other settings (Dranove & Gandal, 2003;Stremersch et al., 2007). The strategic issue in this literature is often based on devising strategies to ensure same-and cross-side network effects are optimized. ...
“Freemium” product strategies—where a free basic version of a product is offered alongside a full “premium” paid version—are often used by companies to attempt to increase the size of their user base and benefit from network effects. However, there is limited empirical evidence of how this strategy impacts company performance. We investigate empirically how the strengthening of network effects on the Apple App Store influenced the revenues generated by market leaders and followers, contrasting firms that use paid only versus freemium strategies. We find that stronger network effects did not on their own lead to greater revenue for market leaders w.r.t. followers. However, in settings where freemium strategies were used, network effects greatly amplified the advantage of leaders over followers.
... The classic example is a telephone network, in which the utility of the network to the individual increases with the number of users the individual can talk with. Network externalities have been studied in many areas, such as business firms [21]- [24], consumer electronics equipment [25] and UGCSNets [13]- [14], [17]- [19]. ...
User-generated content sharing networks (UGCSNets), in which members are content contributors as well as users, have had a significant impact on the sharing economy and on society via the sharing and reuse of contents. In a UGCSNet, managing for growth requires a quantitative grasp of how individual members’ participation and sharing affect and are affected by the membership and content volume; these interactions form a dynamic loop. In this paper, a quantitative modeling approach for the loop dynamics of UGCSNet growth is developed by exploiting limited empirical data. A teaching material sharing network (TMSN) serves as a baseline case study, and Wikipedia serves as a validation case for the modeling approach design. The novel modeling approach consists of i) a set of generalized Bass diffusion model-embedded stochastic difference equations (GBDSDEs) of the loop dynamics and ii) a quasibootstrap- based nonlinear least square (QBNLS) method to extract from the limited empirical data and periodically update the model parameters as the UGCSNet evolves. In GBDSDEs, two difference equations describe the number of members and content volume evolution. The stochastic drives consist of measures of individual participation and content uploading. The drive models are an innovative generalization of the Bass diffusion model (BDM) as probabilistic models of known qualitative descriptions regarding how the individual willingness to participate and share is affected by the total membership and content volume. Analyses of the coefficients of determination show good fits between model predictions and actual outcomes for both SCTNet and Wikipedia growths. Applications of the modeling approach to what-if analyses demonstrate its value to predict and assess the effects of specific managerial strategies—such as the initial content volume and the number of founding altruistic members—on the growth of a UGCSNet.
... As such, the NPP literature may be approached from the point-ofview of the signal sender, the receiver, and the market conditions that influence how receivers perceive and respond to signals. From the sender's perspective, past studies have examined the motivations of firms to preannounce, for instance, with the aim to deter entry into a particular industry (Bayus et al., 2001;Ofek & Turut, 2013), to help establish industry standards (Dranove & Gandal, 2003), or to influence the diffusion of a new technology (Farrell & Saloner, 1986). ...
... Other empirical studies estimated demand functions for network products but only focused on indirect network externalities. These studies revealed the connections between the demand of one product and its complementary product supply (Clements and Ohashi, 2005;Dranove and Gandal, 2003;Nair et al., 2004). Nonetheless, few studies have explicitly examined the demand or price functions for products under direct network externalities, especially in the context of MMORPGs. ...
Purpose
Massively multiplayer online role-playing games (MMORPGs) create quasi-real social systems in which players can interact with one another, and quasi-real economic systems where players can consume and trade in-game items with virtual currency. The in-game currency price, an important indicator of a virtual economy, is highly contingent on players’ behavioral interaction in MMORPGs. The purpose of this paper is to adopt a network perspective to examine how topological characteristics of social networks in an MMORPG, namely, network externalities, density, and closure, would exert impacts on the in-game currency price.
Design/methodology/approach
Players’ behavioral data were collected from a popular MMORPG in China on a weekly basis for 52 weeks. With a time series analytical approach, the empirical model for the price function of in-game currency was estimated with vector autoregression.
Findings
The results show that the number of core avatars and network density are positively associated with in-game currency price, while network closure has a negative effect on in-game currency price. However, in-game currency price is found to have no significant relationship with the trade volume of the currency.
Originality/value
This study fills in an important research gap by investigating factors influencing the in-game currency price of MMORPGs from a network perspective, which contributes to the existing literature of network effects and advances our understanding about how players’ interaction will influence the dynamics of a virtual economy. The findings could offer useful insights for online game companies to better understand their players’ social interaction and consumption behavior.
... The focus of the NPP literature has been on the decision to preannounce [4,7,23,26], timing of preannouncement [17,19,20], rationale behind preannouncement [8,13] and content of the preannouncement [24]. Other studies have studied diffusion of preannounced products [25], vaporware [2,6] and user welfare [11,12,18]. ...
... al (1999), Gandal et. al (2000, Gandal and Dranove (2003)), a theoretical analysis of how innovation in those complementary products influence competition is missing. ...
What determines competitive efforts and market shares of firms when products require compatible and longer lived complementary goods? We analyze this question in a hardware-software framework, where software producers strategically compete in quality upgrades. Software requires compatible hardware, which we assume to be constant in technology and competitively supplied. Using numerical simulation, we examine the effect of various drivers on competitive efforts. We find that indirect network effects generally tie together the competitive efforts of firms on the same platform. Innovations on the same platform are therefore complementary for a broad range of parameters. Consequently, firms may even enjoy a net increase in market-share from an innovation by a competitor on the same platform. Moreover, since with complementary goods adjustment of market shares takes time, history matters. We would like to thank Shane Greenstein for very helpful comments. All remaining errors are ours.
... Sie werden am ehesten noch in der ökonomischen Literatur zu "Standardkriegen" thematisiert, wenn auch nur aus der Perspektive von Unter- nehmen oder Standardisierungskonsortien, die durch ein strategisches Manage- ment von Nutzererwartungen, eine Konkurrenten unterbietende Preispolitik und die Verbreitung von Zweifeln und Unsicherheiten über die Effizienz konkurrieren- der Standards eine möglichst schnelle Etablierung ihres eigenen Standards am Markt zu erzielen suchen (z.B. Dranave u. Gandal 2003). Erklärungsversuche über rationales Wahlhandeln unterschätzen die Erwartungsunsicherheiten, die in komplexen gesellschaftlichen Kontexten (insbesondere auch im transnationalen Kontext) existieren. ...
... 3 He also emphasized marketing strategy, and perfected the principle of 'imputing', that is, carefully planned communication to make a great first impression. Such strategy is particularly important in network industries where managing consumers' expectations, for example, via quality and timing of product pre-announcements (which form a part of our study), is vital (Dranove and Gandal, 2003;Sorescu et al., 2007). ...
We study the value of innovation in a case study of one of the most visible innovative products in recent years, Apple’s iPhone. The value effects of news announcements, patent publications, and trademarks relating to iPhone are taken into account. Our estimate of the lower bound on the value of iPhone is fairly high, 30 billion U.S. (event-day) dollars or 10% to 13% of the firm’s market cap (at the end of 2009). We find that patentable technology explains about 25% of the total value, which derives from market reactions to publication of patent applications rather than grants. We also observe a weak negative reaction among Apple’s rivals to news about iPhone. Apple appears to capture most of the value within the iPhone supply chain.
... First, the optical disc industry has diverse inventors and organizations that actively engage in patenting activity (Joshi & Nerkar, 2011). Second, DVD technology standards were established in 1996 (Dranove & Gandal, 2003), and the movement of setting the next generation technology -Blu-ray-started after 2001. This means that, because the period 1997-2001 was influenced less by technology change, we can control for exogenous technology effects to some degree. ...
Inventing processes are often greatly complex, resulting in the difficulty of creating breakthrough inventions. But the relationship between the complexity of inventing and the creation of breakthrough inventions and ways of dealing with the complexity of inventing have received little research attention. This study focuses on the effect of coupling, one of the causes of complex inventing, on the likelihood of creating breakthrough inventions and suggests two moderating factors: the size of collaboration teams and the oldness of prior art. Based on U.S. granted patents in optical disc technology domains applied during 1997–2001, the empirical results showed the negative effect of coupling on the likelihood of creating breakthrough patents and the weakening moderating effect of the number of inventors involved in generating patents.
... where R 2 is given by Eq. (8). By algebra, we obtain the optimal ϕ 2 conditional on ϕ 1 : ...
This paper develops a game-theoretical model wherein duopolistic firms launch a new product and invest in informative advertising. We allow firms to adopt new product preannouncement (NPP), which is a strategy of forward advertising for a future product. The results show that NPP relaxes market competition and that firms with different advertising costs have different incentives to apply NPP. We also allow firms to adopt retaliatory preannouncement as a response to NPP, and find that NPP is always good for the high-cost firm but may be bad for the low-cost firm. We further investigate the welfare effects of NPP, showing that NPP makes customers worse off while has ambiguous effects on total welfare.
... There is plenty of evidence for this kind of externality in a market [9,11,14]. We can find another example of indirect NE in DVD's market (formerly VCR's market) in [3,16,17], where standards are shown to affect the market. In video games [2,18,20], for instance, it is clearer the fact that two-sided markets can create network externalities as well. ...
In this work, we develop a differential game of a duopoly where two firms compete for market share in an industry with Network Externalities. Here the evolution of the market share is modeled in such a way that the effects of advertising efforts that both firms make are a function of the share itself. This means that the efficacy of marketing efforts are diminished with low market share and enhanced when it is higher. We show that Network Externalities can influence the decision a firm makes about marketing expenditures. Particularly, when a firm is large enough, the creation of a monopoly is easier when this market structure is present. For this, we obtain the optimal strategies for the firms and test them on a simulation, where we compare the market with and without this kind of externalities. We find that the value of the market share in proportion with the cost of obtaining it by advertising efforts is the key to know the long term equilibrium market share.
... There is plenty of evidence for this kind of externality in a market [9,11,14]. We can find another example of indirect NE in DVD's market (formerly VCR's market) in [3,16,17], where standards are shown to affect the market. In video games [2,18,20], for instance, it is clearer the fact that two-sided markets can create network externalities as well. ...
In this work, we develop a differential game of a duopoly where two firms compete for market share in an industry with Network Externalities. Here the evolution of the market share is modeled in such a way that the effects of advertising efforts that both firms make are a function of the share itself. This means that the efficacy of marketing efforts are diminished with low market share and enhanced when it is higher. We show that Network Externalities can influence the decision a firm makes about marketing expenditures. Particularly, when a firm is large enough, the creation of a monopoly is easier when this market structure is present. For this, we obtain the optimal strategies for the firms and test them on a simulation, where we compare the market with and without this kind of externalities. We find that the value of the market share, in proportion with the cost of obtaining it by advertising efforts are the key to know the long term equilibrium market share.
... 3 Firms with an improved future product have 1 For instance, Boeing may have attempted, and failed, to pre-empt development of Airbus' A380, by announcing plans to develop a new variant of the 747 which would match its capacity; see [Esty and Ghemawat, 2002, http://ssrn.com/abstract_id=302452]. Or, announcements might help coordinate consumers and suppliers on a standard when there are network externalities or questions of compatibility; see, for instance, Dranove and Gandal [2003]. ...
... Consequently, it can be especially difficult for newcomers to unseat an established rival in markets where the influence of network externalities is strong. Moreover, given the value consumers place on installed base and market dominance, feature-richness and quality may lose in importance -with the result that the "best" product or service does not always win (Farrell and Saloner 1986;Katz and Shapiro 1992;Dranove and Gandal 2003). ...
In this paper we analyze determinants which affect the selection of mobile carriers in a post-conflict environment - Bosnia and Herzegovina. We apply relevant probability modelling to test perceptions of individual respondents on different network effects obtained through a targeted representative survey. Furthermore, we explore whether some non-traditional influences might affect costumers, focusing on the role of demographic characteristics. Our results confirm that conventional network effects have a role in carrier selection, although they are different across carriers. However, we identify that the ethnicity of respondents overwhelms the traditional network effects by having the highest magnitude in the model. Our findings show that the “ethnic affiliation” of mobile carriers, attributed by the users, remains a persistent factor in attracting and keeping telecommunication costumers in Bosnia and Herzegovina.
... This implies that the positive " spillover effect " within category could manifest as well in the following months in the focal category after the completion of blockbuster projects. Besides, the cannibalization effect would gradually fade away after the completion of blockbuster projects (Dranove and Gandal 2003). Hence, lasting effects of positive network externality will show up. ...
Crowdfunding has gained momentum in recent years. Even though an increasing amount of research has been devoted to the economic value of crowdfunding marketplaces, the interactions and effects among crowdfunding projects have yet to be fully studied. The current study strives to bridge this gap by examining the impacts of "blockbuster projects" — i.e., overwhelmingly successful projects – on the crowdfunding platform. Hypotheses are formulated based on the theory of network effects. Our preliminary results suggest the blockbuster projects exhibit positive spill-over effects within project category but cannibalization effects across categories. We also find evidence of lasting positive/negative network externality within/across category/categories. Further analysis suggests that fresh backers who are attracted to the platform by the blockbuster projects tend to be more engaged and more active. Our research aims to extend the emergent crowdfunding literature by examining network externalities among projects. We also provide practical implications for project creators and platform administrators.
... For managers in firms that do not possess technological advantages, this study confirms that keeping intermediate R&D successes secret may be a more effective mechanism for protecting profits from innovation. In such cases, the profit-maximizing strategy is to disclose product innovations only around the timing of launching new products in order to capture value innovations without enabling competitors to appropriate this value (Bayus, Jain, & Rao, 2001;Dranove & Gandal, 2003;Haan, 2003). http://press.rim.com/release.jsp?id=981 ...
Firms make tradeoffs in voluntarily and publicly disclosing R&D information. Disclosure can deter competition by signaling a technological advantage. However, such disclosures might signal technological opportunity and encourage competitors to develop competing innovations. This study investigates the effect of industry-and firm-specific advantages on the influence of voluntary public disclosure on competitors' patenting in the same technology space. Theoretical predictions are tested on a sample of 322 publicly traded firms between 1991 and 2004. The results are consistent with industry and firm-specific advantages moderating the effectiveness of disclosure along with patents as a strategy for capturing value from product innovation.
Research Summary
“Freemium” product strategies—where a free basic version of a product is offered alongside a full “premium” paid version—are often used by companies to attempt to increase the size of their user base and benefit from network effects. However, there is limited empirical evidence of how using freemium strategies impacts firm revenues. We empirically investigate how the strengthening of network effects on the Apple App Store influenced product sales of firms using freemium strategies, contrasting the impacts on both market leaders and followers. We find that stronger network effects did not on their own lead to greater revenues for market leaders w.r.t. followers. However, in settings where freemium strategies were used, network effects greatly amplified the advantage of leaders over followers.
Managerial Summary
Freemium strategies are increasingly common as a way for firms to increase the number of users and benefit from network effects. However, there has not been much empirical investigation in this regard, particularly in cases where products using freemium strategies face competition. In this paper, we investigate how a policy by Apple on the App Store that led to stronger network effects, impacted the performance of market leaders and followers depending on whether they used freemium or not. We find that it led to an increase in revenues of leaders over followers (effectively, market dominance) but only when freemium strategies were used. The analysis demonstrates an interplay the between business model and network effects. In addition, it shows how stronger network effects and freemium strategies only benefitted market leaders in our setting.
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This paper describes the Searle Center Database on Technology Standards and Standard Setting Organizations (SSOs). This database combines comprehensive information on technology standards, SSO membership, and SSO characteristics in a format designed for economic research. In particular, the database includes data on quantifiable characteristics of 797,711 standard documents issued by 615 SSOs, institutional membership in a sample of 191 Standards Organizations, and the rules of 36 SSOs on standard adoption procedures, standard‐essential patents (SEPs), participation, and openness. Using the Internet Archives, we track both institutional membership and the SSO rules and procedures over time since the inception of the Archives in 1996. We identify 67,417 entities participating in at least one Standards Organization. The paper describes how to combine these data with other new databases on standard‐related patents and standardization processes at 3GPP; and sketches avenues for empirical research.
Um Standard é um conjunto de especificações que determinam a compatibilidade de diferentes produtos. A definição de um standard pode determinar o sucesso ou o fracasso de uma empresa nos mercado, assim como seu nível de lucratividade e penetração de mercado. Por isso as batalhas de standards têm sido estudadas para identificar os elementos que influenciam a adoção de um standard e as diversas estratégias conduzidas por empresas. O presente artigo aborda os elementos de influência e apresenta um esquema das estratégias conduzidas pelas empresas, que podem adotar pela adoção de um standard já estabelecido, ou pela criação de novo standard.
This chapter traces the social network related research history in economics, marketing, sociology and physics. It distils the key insights from this research for the study of how consumers influence each other's purchasing decisions. The chapter reviews the key findings from the economics and marketing literature and their implication for company strategies. It focuses on the sociology literature on social network analysis, and discusses the key findings from the literature on complex networks. The chapter reviews the latest developments in the empirical literature on social networks, with a particular emphasis on social network analysis as a technique to derive value from very large-scale social network datasets and on identifying causality.
Platforms have evolved beyond just being organized as multi-sided markets with complementors selling to users. Complementors are often unpaid, working outside of a price system and driven by heterogeneous sources of motivation — which should affect how they respond to platform growth. Does reliance on network effects and strategies to attract large numbers of complementors remain advisable in such contexts? We test hypotheses related to these issues using data from 85 online multi-player game platforms with unpaid complementors. We find that complementor development responds to platform growth even without sales incentives, but that attracting complementors has a net zero effect on on-going development and fails to stimulate network effects. We discuss conditions under which a strategy of using unpaid crowd complementors remains advantageous.
When a durable good of uncertain quality is introduced to the market, some consumers strategically delay their buying until the next period, with the hope of learning the unknown quality. I analyze the monopolist's pricing and waiting strategies when consumers have strategic delay incentives. I show when the monopolist offers introductory low prices in pooling equilibria. I also find two types of separating equilibria: one where the high-type monopolist signals its quality by choosing a different price than the low-type monopolist in the first period and another where the high-type monopolist announces the product in the first period and waits to sell only in the second period. Waiting creates a credible cost for signaling; hence, the monopolist uses it as a signaling device.
Research on network externalities has identified a number of product categories in which the market performance of an innovation (e.g., unit sales and revenues) is an increasing function of that innovation's installed base and the availability of complementary products. Innovation scholars have attributed these findings to the positive impact of network externality variables on consumer perceptions of innovation attributes. This paper provides the first empirical examination of these perceptual linkages by extending the Technology Acceptance Model to include consumer perceptions of network externality variables. The authors hypothesize that, when direct and indirect network externalities exist, consumer purchase intentions and consumer perceptions of an innovation's usefulness and ease of use will positively reflect perceptions of installed base size and the availability of complementary products. To test this reasoning, the authors developed new measures of consumer perceptions of network externality variables. These measures were incorporated into a survey that explored the attitudes in Japan of potential adopters toward digital music (DM) players at an early stage in the product life cycle. Findings reveal a direct positive relationship between ease of use and the perceived availability of digital music. The authors also find positive and significant relationships between both purchase intention and perceived usefulness and (1) the perceived size of the DM player installed base and (2) the perceived availability of digital music. An application of the Baron-Kenny test for mediating variables reveals that (1) ease of use partially mediates the relationship between the perceived availability of digital music and perceived usefulness and (2) perceived usefulness partially mediates the relationship between the perceived availability of digital music and purchase intention. The research has important implications for future research on new product adoption and for the management of innovations that involve network externalities. The conceptual model provides a framework for testing alternative explanations of observed variations in the impact of network externalities within and across product categories. The empirical analysis provides guidance for managers who wish to manage the impact of network externalities on adoption. In addition to stimulating the size of the installed base and the variety of complementary products, executives must also manage consumer awareness of network externality variables and consumer understanding of the relationship between those variables and innovation attributes. Finally, traditional adoption models link consumer adoption decisions to perceptions of innovation attributes. The findings provided here imply that predictive accuracy of these models can be improved by including consumer perceptions of network externality variables.
A number of studies have investigated the factors affecting health information technology (IT). However, these studies have not focused on the possibility that some products have more value when others are using them as well. The importance of this network effect has been widely recognized in IT industry organizations as well as in other sectors. However, few empiricalStudies have looked at the network effect in health IT adoption. This paper examines the impact of neighbor hospitals’ IT capital adoption and IT labor employment on a hospital’s IT capital adoption, using the California Office of Statewide Health Planning and Development (OSHPD) data from 2000 to 2007. Findings show that neighbor hospitals’ IT capital adoption and IT labor employment were associated with an increase in a hospital’s IT capital adoption. This network effect varied across hospital characteristics.
Smartphones are "systems," that is, collections of (hardware and software) components that work well with one another. They can also be viewed as multi-sided platforms that connect two or more distinct types of customers (users, application developers, handset manufacturers, network operators, and advertisers) and are characterized by the existence of indirect network effects - an extra customer on one side generates benefits for customers on the other side. In this study we focus on one specific aspect of the growth dynamics of Apple's iPhone: the feedback effects between users and applications (or application developers). After briefly tracing the history of the iPhone, we construct time series of users and apps. We then carry out cointegration analysis and estimate dynamic OLS (DOLS) and vector error correction models (VECM). We find evidence of indirect network effects of a substantial magnitude.
We study a model with a durable good subject to periodic obsolescence and analytically characterize the optimal purchasing policy. The key result is that consumers optimally synchronize new purchases with the innovation cycle. The model simultaneously explains coordinated adoption without invoking network effects and provides a theoretical underpinning for a diffusion curve that features a temporary adoption slowdown.
The software industry practice of announcing new products well in advance of actual market availability has led to allegations that firms are intentionally engaging in vaporware. The possible predatory and anticompetitive implications of this behavior recently surfaced in the antitrust case United States v. Microsoft Corporation. Taking the perspective that a new product announcement is a strategic signal among firms, the authors consider the possibility that intentional vaporware is a way to dissuade competitors from developing similar new products. An examination of empirical data for the software industry suggests that some firms use vaporware in a strategic manner. The authors then formulate and analyze the preannouncement and introduct on timing decisions in a game-theoretic model of two competing firms. They find that vaporware can be a way for a dominant firm to signal its product development costs and that intentional vaporware can deter entry The authors also show that there is a curvilinear relationship between development costs and announcement accuracy; that is, firms with high or very low product development costs make accurate product announcements, whereas firms with intermediate product development costs intentionally engage in vaporware. Empirical support for these theoretical results is also found in the software industry data. Finally, the authors discuss the beneficial and harmful consequences of vaporware and the associated implications.
This article examines Microsoft's licensing practices for its MS-DOS and Microsoft Windows operating system software. Our main focus is on Microsoft's use of CPU (central processing unit, or per-processor) licenses, under which an original equipment manufacturer (OEM) of personal computers pays a royalty for each machine it ships instead of for each unit of MS-DOS installed. We also examine Microsoft's practice of requiring in these licenses a minimum number of personal computers (PCs) on which MS-DOS can be installed, Microsoft's tying of Microsoft Windows and technical support information to the sale of MS-DOS, and Microsoft's attempts to induce technical incompatibility between MS-DOS and its main competitor, DR-DOS. Finally, we turn to the proposed consent decree between Microsoft and the Department of Justice.
Existing strategies for econometric analysis related to macroeconomics are subject to a number of serious objections, some recently formulated, some old. These objections are summarized in this paper, and it is argued that taken together they make it unlikely that macroeconomic models are in fact over identified, as the existing statistical theory usually assumes. The implications of this conclusion are explored, and an example of econometric work in a non-standard style, taking account of the objections to the standard style, is presented.
Because of network externalities, the success of a software product may depend in part on the size of its installed base and its conformance to industry standards. This research builds a hedonic model to determine the effects of network externalities, standards, intrinsic features and a time trend on microcomputer spreadsheet software prices. When data for a sample of products during the 19871992 time period were analyzed using this model, four main results emerged: 1) Network externalities, as measured by the size of a product's installed base, significantly increased the price of spreadsheet products: a one percent increase in a product's installed base was associated with a 0.75% increase in its price. 2) Products which adhered to the dominant standard, the Lotus menu tree interface, commanded prices which were higher by an average of 46%. 3) Although nominal prices increased slightly during this time period, quality-adjusted prices declined by an average of 16% per year. 4) The hed...
Economic scholarship has recently focused a great deal of attention on the phenomenon of network externalities, or network effects: markets in which the value that consumers place on a good increases as others buy the good. Though the economic theory of network effects is less than fifteen years old, and is still not thoroughly understood, network effects are increasingly playing a role in legal argument. Judges, litigators and scholars have suggested that antitrust law, intellectual property, telecommunications law, Internet law, corporate law, contract law and even the law of racial discrimination need to be modified to take account of network effects. Their arguments reflect a wide range of views about what network effects are and how courts should react to them. In this Article, we explore the application of network economic theory in each of these contexts. We suggest ways in which particular legal rules should -- and should not -- be modified to take account of network effects. We also attempt to draw some general conclusions about the role of network economic theory in the legal enterprise, and about the way in which courts should revise legal doctrines in response to theories from fields outside the law.
Building on the Resource-Based View of the firm, we advance the idea that a firm's customer network can be a strategic asset. We suggest that network effects are a function of network size (i.e., installed customer base) and network strength (i.e., the marginal impact of a unit increase in network size on demand). We empirically study these network effects in the 16-bit home video game industry in which the dominant competitors were Nintendo and Sega. In the spirit of the new empirical IO framework, we estimate a structural econometric model assuming the data are equilibrium outcomes of the best fitting non-cooperative game in price and advertising. After controlling for other effects, we find strong evidence that network effects are asymmetric between the competitors in the home video game industry. Specifically, we find that the firm with a smaller customer network (Nintendo) has higher network strength than the firm with the larger customer base (Sega). Thus, our results provide a possible explanation for this situation in which the firm with a smaller customer network (Nintendo) was able to overtake the sales of a firm with a larger network size (Sega). These empirical results suggest that the ultimate outcome in a competitive market with network effects is more complex than simply accepting that the firm with the largest installed customer base will always be the winner.
In the tradeoff between standardization and variety, there can be too much or too little variety. The latter possibility can only happen if there are several equilibria.
The network externalities hypothesis postulates that consumers prefer to purchase brands which are bought by more consumers compared with brands with a low market share. In this paper, we show that increasing returns to scale in the production of complementary products can substitute for the network externalities assumption. We develop a model for the computer industry in which the production of complementary software requires a large fixed cost of development relative to the cost of duplicating and marketing the software. The increasing returns to scale in the production of software yields consumers' behavior which is very similar to consumers who have preferences exhibiting network externalities.
We build a dynamic model of competition between operating systems. Software applications run on each platform and are owned either by one of the OS companies or by an independent producer. Consumers are forward looking and face lock-in to an operating system due to switching costs. We also look at policy experiments such as breaking up an integrated firm into an OS provider and an application business
We develop a dynamic structural model of consumers' choices and producers' pricing in an oligopolistic market for newly introduced durable products with network externalities. The model is then applied to empirically analyze the de facto standardization of the VHS format in the U.S. home VCR market during 1981-1988. We find: (i) the network advantage of VHS explains at least 70.3% to 86.8% of (the logarithm of) relative sales of VHS to Betamax in each year; (ii) an increase in the network advantage of VHS was an engine of tipping toward the VHS format; and (iii) in the early 1980s, the network advantage of VHS was mainly due to its expected growth advantage. Copyright (c) 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.
This paper is an empirical study of the value of four file compatibility standards for transferring data in the personal computer software market. The results are that only the LOTUS file compatibility standard is significant in explaining price variations and it is significant in both the spreadsheet and database management system markets. This supports the hypothesis that the personal computer software market exhibits complementary network externalities. Copyright 1995 by MIT Press.
We analyze the extent of network externalities for the automated clearinghouse (ACH) electronic payments system using a panel dataset on bank adoption and usage of ACH. We develop three methods. The first examines the clustering of ACH adoption. The second examines the impact of market concentration and the size of competitors on ACH adoption. The third examines the impact of ACH adoption by small branches of large banks on local competitors. These methods separately identify network externalities from technological advancement, peer-group effects, economies of scale, and market power. We find evidence that the network externalities are moderately large.
We examine the diffusion of a hardware/software system. For such systems there is interdependence between the hardware-adoption decisions of consumers and the supply decisions of software manufacturers. Hence there can be bottlenecks to the diffusion of the system. We consider the CD industry and estimate the (direct) elasticity of adoption with respect to CD player prices and the (cross) elasticity with respect to the variety of CD titles. Our results show that the cross elasticity is significant. Our model can be used to quantify the effect of various policies aimed at speeding up the diffusion of a system.
In this article, I first estimate hedonic price equations for computer spreadsheet programs, and then use the analysis to empirically test whether network externalities exist in this industry. The study shows that consumers are willing to pay a significant premium for spreadsheets that are compatible with the Lotus platform and for spreadsheets that offer links to external databases, and a similar premium for spreadsheets that offer local area network externalities. Finally, the quality-adjusted (real) price of computer spreadsheets declined by approximately 15% per year from 1986 to 1991.
This research examines the relative strength and significance of the status of "incumbent contractor" in federal computer procurement. One finding, as expected, is that an agency is likely to acquire a system from an incumbent vendor. Another finding, perhaps more interesting, is that the (in)compatibility between a buyer's installed base and a potential system also influences the vendor choice; a result that may be the first econometric measurement of the competitive effects of incompatibility. An illustration of this thesis comes from IBM's experience. New evidence shows, however, that IBM's apparent disadvantage with government agencies is largely due to incompatibilities in IBM's product line.
The utility that a subscriber derives from a communications service increases as others join the system. This is a classic case of external economies in consumption and has fundamental importance for the economic analysis of the communications industry. This paper analyzes the economic theory of this kind of interdependent demand. We begin by defining "equilibrium user set" as a set of users consistent with all individuals' (users and nonusers) maximizing their utilities. There are typically multiple equilibria at any given price, and which equilibrium is attained depends partly on the static model, partly on the initial disequilibrium conditions, and partly on the disequilibrium adjustment process. Some general properties of equilibrium user sets are derived. Then we turn our attention to some specific models based on simple characterizations of communities of interest. The implications for pricing are discussed, with special reference to the problem of starting up a new communications service (e.g., a video communications service).
We develop and implement a collocation method to solve for an equilibrium in the dynamic legislative bargaining game of Duggan and Kalandrakis (2008). We formulate the collocation equations in a quasi-discrete version of the model, and we show that the collocation equations are locally Lipchitz continuous and directionally differentiable. In numerical experiments, we successfully implement a globally convergent variant of Broyden's method on a preconditioned version of the collocation equations, and the method economizes on computation cost by more than 50% compared to the value iteration method. We rely on a continuity property of the equilibrium set to obtain increasingly precise approximations of solutions to the continuum model. We showcase these techniques with an illustration of the dynamic core convergence theorem of Duggan and Kalandrakis (2008) in a nine-player, two-dimensional model with negative quadratic preferences.
We briefly review the rationale behind technological alliances and provide a snapshot of their role in global competition, especially insofar as it is based around intellectual capital. They nicely illustrate the increased importance of horizontal agreements and thus establish the relevance of the topic. We move on to discuss the organisation of industries in a dynamic context and draw out consequences for competition policy. We conclude with an outlook on the underlying tensions between technology alliances, competition policy, and industrial policy.
In this paper, the authors examine the software provision decision of software firms. The provision decision by software firms determines the value and, hence, the market share of competing hardware technologies. The authors show how the provision decision by software firms determines whether multiple hardware technologies are supported in equilibrium or whether there is de facto standardization, with only one hardware technology supplied with software in equilibrium. They show that when consumers place a high value on software variety there is a suboptimal amount of standardization by the market. Copyright 1992 by Blackwell Publishing Ltd.
The authors study the introduction of a new product in a market with network externalities. There is a common presumption that such markets exhibit excess inertia, i.e., that they are biased toward existing products. In contrast, the authors provide conditions under which equilibrium involves insufficient friction, i.e., a tendency to rush into new, incompatible technologies. They also analyze the firms' incentives to make their products compatible and they show that the firm introducing the new technology is biased against compatibility. Copyright 1992 by Blackwell Publishing Ltd.
This paper estimates the importance of network effects in the market for Yellow Pages. I estimate three simultaneous equations:
consumer demand for usage of a directory, advertiser demand for advertising and a publisher's first-order condition (derived
from profit-maximizing behaviour). Estimation shows that advertisers value consumer usage and that consumers value advertising,
implying a network effect. I find that internalizing network effects would significantly increase surplus. As an application,
I consider whether the market benefits from monopoly (which takes advantage of network effects) or oligopoly (which reduces
market power). I find that a more competitive market is preferable.
This paper discusses firm behavior, market performance, and the public and private institutions that arise in systems markets, i.e., markets where consumers use compatible components together to generate benefits. In such markets, which include communications networks and 'hardware/software' networks, popular products are inherently more valuable. These 'network effects' can drive corporate strategies and are critical in understanding innovation in many high-technology markets. The discussion here emphasizes the dynamics of consumer adoption decisions in the presence of network effects, competition between incompatible systems, and how suppliers choose which components are compatible and which are not. Copyright 1994 by American Economic Association.
There occurs on some occasions a difficulty in deciding the direction of causality between two related variables and also whether or not feedback is occurring. Testable definitions of causality and feedback are proposed and illustrated by use of simple two-variable models. The important problem of apparent instantaneous causality is discussed and it is suggested that the problem often arises due to slowness in recordhag information or because a sufficiently wide class of possible causal variables has not been used. It can be shown that the cross spectrum between two variables can be decomposed into two parts, each relating to a single causal arm of a feedback situation. Measures of causal lag and causal strength can then be constructed. A generalization of this result with the partial cross spectrum is suggested.The object of this paper is to throw light on the relationships between certain classes of econometric models involving feedback and the functions arising in spectral analysis, particularly the cross spectrum and the partial cross spectrum. Causality and feedback are here defined in an explicit and testable fashion. It is shown that in the two-variable case the feedback mechanism can be broken down into two causal relations and that the cross spectrum can be considered as the sum of two cross spectra, each closely connected with one of the causations. The next three sections of the paper briefly introduce those aspects of spectral methods, model building, and causality which are required later. Section IV presents the results for the two-variable case and Section V generalizes these results for three variables.
This economic analysis by participants for the defense argues that the IBM case failed not because the antitrust laws are obsolete, but because the government and its economists made major analytical errors throughout the case.
In this paper we develop a model with (1) differentiated consumers, (2) endogenous adoption times, (3) technical uncertainty, and (4) alternative technologies sponsored by competing vendors. We identify conditions under which orphaning arises endogenously in a framework of dynamic competition. We then use the model to examine the development of the microcomputer market in the early 1980s, when the orphaning of a widely-adopted operating system occurred. We find that the data characterizing this event are consistent with our theoretical framework. JEL Classification Numbers: L86, O33. We are grateful to Richard Arnott, Tim Bresnahan, Francesca Cornelli, Gregory Duncan, Raphael Rob, Yishai Yafeh and seminar participants at the 1994 Winter Econometric meetings, the University of Pennsylvania, and INSEAD for helpful comments. We received outstanding research assistance fromSubhendu Roy and Susan McMaster. Greenstein would like to acknowledge partial funding from NSF IRI-92-09321. Please ad...
Network Externalities and Technology Adop-tion: Lessons from Electronic Payments Investigating Causal Relations by Econometric Models and Cross-Spectral Methods
- G Gowrisankaran
- J Stavins
- Nber Granger
Gowrisankaran, G. and J. Stavins, 2002, " Network Externalities and Technology Adop-tion: Lessons from Electronic Payments, " Working Paper No. 8943, NBER. Granger, C., 1969, " Investigating Causal Relations by Econometric Models and Cross-Spectral Methods, " Econometrica, 37, 424 – 438.
- C Chou
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Chou, C. and O. Shy, 1990, " Network Effects without Network Externalities, "
International Journal of Industrial Organization, 8: 259-270.
- Lemley M.
Stavins 2002 “Network Externalities and Technology Adoption: Lessons from Electronic Payments ” Working Paper No
- G Gowrisankaran
- Andj
Quantitative Analysis of Network Externalities in Systems Competition: The VCR Case ”Mimeo SUNY-Stony Brook
- S Park