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Quantitative Analysis of Network Externalities in Competing Technologies: The VCR Case

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  • Sangin Park

    (Graduate School of Public Administration, Seoul National University)

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    Abstract

    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. © 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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    Bibliographic Info

    Article provided by MIT Press in its journal Review of Economics and Statistics.

    Volume (Year): 86 (2004)
    Issue (Month): 4 (November)
    Pages: 937-945

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    Handle: RePEc:tpr:restat:v:86:y:2004:i:4:p:937-945

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    Cited by:
    1. Binken, J.L.G. & Stremersch, S., 2008. "The Effect of Superstar Software on Hardware Sales in System Markets," ERIM Report Series Research in Management, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasm ERS-2008-025-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    2. Marc Rysman & Gautam Gowrisankaran & Minsoo Park, 2011. "Measuring Network Effects in a Dynamic Environment," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2011-061, Boston University - Department of Economics.
    3. Daniel Birke, 2008. "The economics of networks - A survey of the empirical literature," Occasional Papers, Industrial Economics Division 22, Industrial Economics Division.
    4. Rong, Zhao, 2011. "Free riding and durable adoption: a test of color television consumption in rural China," MPRA Paper 33434, University Library of Munich, Germany.
    5. Salvador Navarro, 2011. "Using Observed Choices to Infer Agent's Information: Reconsidering the Importance of Borrowing Constraints, Uncertainty and Preferences in College Attendance," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers, University of Western Ontario, CIBC Centre for Human Capital and Productivity 20118, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
    6. Charles Z. Liu & Chris F. Kemerer & Michael D. Smith, 2007. "Standards Competition In The Presence Of Digital Conversion Technology: An Empirical Analysis Of The Flash Memory Card Market," Working Papers, NET Institute 07-17, NET Institute, revised Sep 2007.
    7. Christian Dahl Winther, 2007. "Optimal research effort and product differentiation in network industries," Economics Working Papers, School of Economics and Management, University of Aarhus 2007-19, School of Economics and Management, University of Aarhus.
    8. Jongsu Lee & Jae Young Choi & Youngsang Cho, 2009. "A Forecast Simulation Analysis of the Next-Generation DVD Market Based on Consumer Preference Data," TEMEP Discussion Papers, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP) 200933, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Nov 2009.
    9. Szabolcs Lorincz, 2005. "Persistence Effects in a Dynamic Discrete Choice Model - Application to Low-End Computer Servers," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 0510, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    10. Mak, Vincent & Zwick, Rami, 2010. "Investment decisions and coordination problems in a market with network externalities: An experimental study," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 76(3), pages 759-773, December.
    11. Tobias Kretschmer & Katrin Muehlfeld, 2006. "Co-Opetition and Prelaunch in Standard-Setting for Developing Technologies," CEP Discussion Papers, Centre for Economic Performance, LSE dp0742, Centre for Economic Performance, LSE.
    12. Pinar Karaca-Mandic, 2011. "Role of complementarities in technology adoption: The case of DVD players," Quantitative Marketing and Economics, Springer, Springer, vol. 9(2), pages 179-210, June.
    13. Stremersch, S. & Tellis, G.J. & Franses, Ph.H.B.F. & Binken, J.L.G., 2007. "Indirect Network Effects in New Product Growth," ERIM Report Series Research in Management, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasm ERS-2007-019-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    14. Gretz, Richard T., 2010. "Hardware quality vs. network size in the home video game industry," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 76(2), pages 168-183, November.
    15. Richard Gretz, 2010. "Console Price and Software Availability in the Home Video Game Industry," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 38(1), pages 81-94, March.
    16. Gautam Gowrisankaran & Minsoo Park & Marc Rysman, 2010. "Estimating Network Effects in a Dynamic Environment," Working Papers, NET Institute 10-03, NET Institute, revised May 2010.
    17. Jiyoung Kim, 2006. "A Structural Analysis for Consumer's Dynamic Switching Decision in the Cellular Service Industry," Working Papers, NET Institute 06-24, NET Institute, revised Oct 2006.
    18. Corts, Kenneth S. & Lederman, Mara, 2009. "Software exclusivity and the scope of indirect network effects in the U.S. home video game market," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 27(2), pages 121-136, March.
    19. Juan Esteban Carranza, 2010. "Product Innovation and Adoption in Market Equilibrium: The Case of Digital Cameras," BORRADORES DE ECONOMÍA Y FINANZAS 007127, UNIVERSIDAD ICESI.
    20. Feng, Yao, 2011. "Local spillovers and learning from neighbors: Evidence from durable adoptions in rural China," MPRA Paper 33924, University Library of Munich, Germany.

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