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Indirect Network Effects and the Quality Dimension: A Look at the Gaming Industry

  • Jin-Hyuk Kim

    (University of Colorado at Boulder)

  • Jeffrey T. Prince

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

  • Calvin Qiu

    (Independent)

We present theoretical and empirical analyses of indirect network effects for a hardware market with vertically differentiated complementary goods. We demonstrate that the heretofore typical use of aggregate software counts can mis-measure the presence and/or magnitude of indirect network effects. We show this is true when there is correlation along the quality dimension between the marginal utility of software and either 1) the response of software supply to an increase in installed base, or 2) conditional variation in software availability. We illustrate this idea using a simple monopolistic competition model, and through empirical analysis of the 7th-generation console market.

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File URL: http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2013-10-kim-prince-qiu.pdf
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Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2013-10.

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Date of creation: May 2013
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Handle: RePEc:iuk:wpaper:2013-10
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  1. James E. Prieger & Wei-Min Hu, 2007. "Applications Barriers to Entry and Exclusive Vertical Contracts in Platform Markets," Working Papers 07-46, NET Institute, revised Nov 2007.
  2. 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.
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  10. Chou, Chien-fu & Shy, Oz, 1990. "Network effects without network externalities," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 259-270, June.
  11. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
  12. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
  13. Corts, Kenneth S. & Lederman, Mara, 2009. "Software exclusivity and the scope of indirect network effects in the U.S. home video game market," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 121-136, March.
  14. Aviv Nevo, 2000. "A Practitioner's Guide to Estimation of Random-Coefficients Logit Models of Demand," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages 513-548, December.
  15. Gretz, Richard T., 2010. "Hardware quality vs. network size in the home video game industry," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 168-183, November.
  16. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
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