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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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    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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    File URL: http://www.netinst.org/Corts-Lederman.pdf
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    Bibliographic Info

    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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    Keywords: network effects; software exclusivity; video games;

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