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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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    Related research

    Keywords: network effects; software exclusivity; video games;

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    1. Harikesh Nair & Pradeep Chintagunta & Jean-Pierre Dubé, 2004. "Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants," Quantitative Marketing and Economics, Springer, vol. 2(1), pages 23-58, 03.
    2. Hall, Bronwyn H. & Mairesse, Jacques & Turner, Laure, 2006. "Identifying Age, Cohort and Period Effects in Scientific Research Productivity - Discussion and Illustration Using Simulated and Actual Data on French Physicists," MERIT Working Papers 042, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    3. Gandal, Neil & Kirkwood MP, Archy & Rob, Rafael, 1999. "The Dynamics of Technological Adoption in Hardware/Software Systems: The Case of Compact Disc Players," CEPR Discussion Papers 2078, C.E.P.R. Discussion Papers.
    4. Kaiser, Ulrich & Wright, Julian, 2004. "Price Structure in Two-sided Markets: Evidence from the Magazine Industry?," ZEW Discussion Papers 04-80, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. James E. Prieger & Wei-Min Hu, 2006. "An Empirical Analysis of Indirect Network Effects in the Home Video Game Market," Working Papers 06-25, NET Institute, revised Oct 2006.
    6. Matthew T. Clements & Hiroshi Ohashi, 2004. "Indirect Network Effects and the Product Cycle: Video Games in the U.S., 1994-2002," CIRJE F-Series CIRJE-F-261, CIRJE, Faculty of Economics, University of Tokyo.
    7. Ravi Mantena & Ramesh Sankaranarayanan & Siva Viswanathan, 2007. "“Exclusive Licensing in Complementary Network Industries”," Working Papers 07-04, NET Institute, revised Apr 2007.
    8. Hiroshi Ohashi, 2003. "The Role of Network Effects in the US VCR Market, 1978-1986," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(4), pages 447-494, December.
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    Cited by:
    1. Ricard Gil & Frédèric Warzynski, 2010. "Vertical Integration, Exclusivity and Game Sales Performance in the US Video Game Industry," Working Papers 10-06, NET Institute, revised Sep 2010.

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