Backward Compatibility to Sustain Market Dominance – Evidence from the US Handheld Video Game Industry
AbstractThe 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 can help moderate this process of rebuilding an installed base. Using a structural model of the US 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 also find that backward compatibility matters most shortly after the introduction of a new generation. Finally, 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 a dominant market position.
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Bibliographic InfoPaper provided by University of Munich, Munich School of Management in its series Discussion Papers in Business Administration with number 11499.
Date of creation: May 2010
Date of revision:
backward compatibility market dominance network effects two-sided markets;
Find related papers by JEL classification:
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media
- O33 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-22 (All new papers)
- NEP-COM-2010-05-22 (Industrial Competition)
- NEP-NET-2010-05-22 (Network Economics)
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