We present a framework to measure empirically the size of indirect network effects in high-technology markets with competing incompatible technology standards. These indirect network effects arise due to inter-dependence in demand for hardware and compatible software. By modeling the joint determination of hardware sales and software availability in the market, we are able to describe the nature of demand inter-dependence and to measure the size of the indirect network effects. We apply the model to price and sales data from the industry for Personal Digital Assistants (PDAs) along with the availability of software titles compatible with each PDA hardware standard. Our empirical results indicate significant indirect network effects. By July 2002, the network effect explains roughly 22% of the log-odds ratio of the sales of all Palm O/S compatible PDA-s to Microsoft O/S compatible PDA-s, where the remaining 78% reflects price and model features. We also use our model estimates to study the growth of the installed bases of Palm and Microsoft PDA hardware, with and without the availability of compatible third party software. We find that lack of third party software negatively impacts the evolution of the installed hardware bases of both formats. These results suggest PDA hardware firms would benefit from investing resources in increasing the provision of software for their products. We then compare the benefits of investments in software with investments in the quality of hardware technology. This exercise helps disentangle the potential for incremental hardware sales due to hardware quality improvement from that of positive feedback due to market software provision.
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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number
1948.
Find related papers by JEL classification: C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - General
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Simon P. Anderson & Andre de Palma & Jacques-Francois Thisse, 1987.
"Demand for Differentiated Products,"
Discussion Papers
726, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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