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Software exclusivity and the scope of indirect network effects in the U.S. home video game market

  • Corts, Kenneth S.
  • Lederman, Mara
Registered author(s):

    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. We look for evidence of 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.sciencedirect.com/science/article/B6V8P-4T77G1P-1/2/3c3513697a4399ae1e52e740407f73cb
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    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 27 (2009)
    Issue (Month): 2 (March)
    Pages: 121-136

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    Handle: RePEc:eee:indorg:v:27:y:2009:i:2:p:121-136
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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    1. 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.
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    9. Nair, Harikesh S. & Chintagunta, Pradeep & Dube, Jean-Pierre, 2003. "Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants," Research Papers 1948, Stanford University, Graduate School of Business.
    10. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
    11. David A. Malueg & Marius Schwartz, 2006. "COMPATIBILITY INCENTIVES OF A LARGE NETWORK FACING MULTIPLE RIVALS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 54(4), pages 527-567, December.
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    13. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
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