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Technological tying and the intensity of price competition: An empirical analysis of the video game industry

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  • Timothy Derdenger

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Abstract

Using data from the 128-bit video game industry I evaluate the impact technologically tying has on the intensity of console price competition and the incentives for hardware firms to tie their produced software to their hardware. Tying occurs when a console hardware manufacturer produces software that is incompatible with rival hardware. There are two important trade-offs an integrated firm faces when implementing a technological tie. The first is an effect that increases console market power and forces hardware prices higher. The second, an effect due to the integration of the firm, drives prices lower. A counterfactual exercise determines technological tying of hardware and software increases console price competition; console makers subsidize consumer hardware purchases in order to increase video games sales, in particular their tied games, where the greatest proportion of industry profits are made. I also determine technological tying to be a dominant strategy for hardware manufacturers when software development costs are low. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Timothy Derdenger, 2014. "Technological tying and the intensity of price competition: An empirical analysis of the video game industry," Quantitative Marketing and Economics (QME), Springer, vol. 12(2), pages 127-165, June.
  • Handle: RePEc:kap:qmktec:v:12:y:2014:i:2:p:127-165
    DOI: 10.1007/s11129-014-9143-9
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    References listed on IDEAS

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    Cited by:

    1. Wallis, Hannah & Nachreiner, Malte & Matthies, Ellen, 2016. "Adolescents and electricity consumption; Investigating sociodemographic, economic, and behavioural influences on electricity consumption in households," Energy Policy, Elsevier, vol. 94(C), pages 224-234.
    2. Stefan Koch & Michael Bierbamer, 2016. "Opening your product: impact of user innovations and their distribution platform on video game success," Electronic Markets, Springer;IIM University of St. Gallen, vol. 26(4), pages 357-368, November.

    More about this item

    Keywords

    Platform markets; Tying; Video game industry; D40; L11; L40; L82;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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