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Market Leadership Through Technology - Backward Compatibility in the U.S. Handheld Video Game Industry

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  • Jörg Claussen
  • Tobias Kretschmer
  • Thomas Spengler

Abstract

The 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 moderates this process of rebuilding an installed base. Using a structural model of the U.S. 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 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 market leadership.

Suggested Citation

  • Jörg Claussen & Tobias Kretschmer & Thomas Spengler, 2012. "Market Leadership Through Technology - Backward Compatibility in the U.S. Handheld Video Game Industry," CEP Discussion Papers dp1124, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1124
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    Cited by:

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    2. Dohoon Kim, 2018. "Equilibrium Analysis for Platform Developers in Two-Sided Market with Backward Compatibility," Games, MDPI, vol. 9(4), pages 1-24, October.

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    More about this item

    Keywords

    backward compatibility; market leadership; network effects; video games; two-sided markets;
    All these keywords.

    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, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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