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Market Leadership Through Technology - Backward Compatibility in the U.S. Handheld Video Game Industry

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  • Jörg Claussen
  • Tobias Kretschmer
  • Thomas Spengler

Abstract

The introduction of a new product generation forces incumbents in network industries to rebuild their installed base to maintain an advantage over potential entrants. We study if backward compatibility moderates this process of rebuilding an installed base. Using a structural model of the U.S. market for handheld game consoles, we show that backward compatibility lets incumbents transfer network effects from the old generation to the new to some extent but that it also reduces supply of new software. We examine the tradeoff between technological progress and backward compatibility and find that backward compatibility matters less if there is a large technological leap between two generations. We subsequently use our results to assess the role of backward compatibility as a strategy to sustain market leadership.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1124.

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Date of creation: Feb 2012
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Handle: RePEc:cep:cepdps:dp1124

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: backward compatibility; market leadership; network effects; video games; two-sided markets;

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