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Software Exclusivity and the Scope of Indirect Network Effects in the U.S. Home Video Game Market

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Author Info
Kenneth S. Corts () (Rotman School of Management, University of Toronto)
Mara Lederman () (Rotman School of Management, University of Toronto)
Abstract

This paper investigates the scope of indirect network effects in the home video game industry. We argue that the increasing prevalence of non-exclusive software gives rise to indirect network effects that exist between users of competing and incompatible hardware platforms. This is because software non-exclusivity, like hardware compatibility, allows a software firm to sell to a market broader than a single platform’s installed base, leading to a dependence of any particular platform’s software on all firms’ installed bases. We look for evidence of these market-wide network effects by estimating a model of hardware demand and software supply. Our software supply equation allows the supply of games for a particular platform to depend not only on the installed base of that platform, but also on the installed base of competing platforms. Our results indicate the presence of both a platform-specific network effect and – in recent years – a cross-platform (or generation-wide) network effect. Our finding that the scope of indirect network effects in this industry has widened suggests one reason that this market, which is often cited as a canonical example of one with strong indirect network effects, is no longer dominated by a single platform.

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Paper provided by NET Institute in its series Working Papers with number 07-43.

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Length: 46
Date of creation: Nov 2007
Date of revision: Nov 2007
Handle: RePEc:net:wpaper:0743

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Related research
Keywords: network effects; software exclusivity; video games;

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Find related papers by JEL classification:
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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