Backward Compatibility to Sustain Market Dominance – Evidence from the US Handheld Video Game Industry
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 can help moderate this process of rebuilding an installed base. Using a structural model of the US 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 also find that backward compatibility matters most shortly after the introduction of a new generation. Finally, 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 a dominant market position.
|Date of creation:||May 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Ludwigstr. 28,80539 Munich, Germany|
Web page: http://www.bwl.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kende, Michael, 1994. "A note on backward compatibility," Economics Letters, Elsevier, vol. 45(3), pages 385-389.
- Smiley, Robert, 1988. "Empirical evidence on strategic entry deterrence," International Journal of Industrial Organization, Elsevier, vol. 6(2), pages 167-180.
- Salop, Steven C, 1979. "Strategic Entry Deterrence," American Economic Review, American Economic Association, vol. 69(2), pages 335-38, May.
- Michael Waldman, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 273-283.
- Binken, J.L.G. & Stremersch, S., 2008. "The Effect of Superstar Software on Hardware Sales in System Markets," ERIM Report Series Research in Management ERS-2008-025-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
- Tobias Kretschmer, 2008. "SPLINTERING AND INERTIA IN NETWORK INDUSTRIES -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 56(4), pages 685-706, December.
- Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
- Kannan Srinivasan, 1991. "Multiple Market Entry, Cost Signalling and Entry Deterrence," Management Science, INFORMS, vol. 37(12), pages 1539-1555, December.
- Nahm, Jae, 2008. "The effects of one-way compatibility on technology adoption in systems markets," Information Economics and Policy, Elsevier, vol. 20(3), pages 269-278, September.
- Heli Koski & Tobias Kretschmer, 2004.
"Entry, Standards and Competition: Firm Strategies and the Diffusion of Mobile Telephony,"
Review of Industrial Organization,
Springer;The Industrial Organization Society, vol. 26(1), pages 89-113, November.
- Koski, Heli & Kretschmer, Tobias, 2002. "Entry, Standards and Competition : Firm Strategies and the Diffusion of Mobile Telephony," Discussion Papers 824, The Research Institute of the Finnish Economy.
- Heli Koski & Tobias Kretschmer, 2005. "Entry, standards and competition : firm strategies and the diffusion of mobile telephony," LSE Research Online Documents on Economics 801, London School of Economics and Political Science, LSE Library.
- Choi, Jay Pil, 1994. "Network Externality, Compatibility Choice, and Planned Obsolescence," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 167-82, June.
- Jongseok Lee & Jeho Lee & Habin Lee, 2003. "Exploration and Exploitation in the Presence of Network Externalities," Management Science, INFORMS, vol. 49(4), pages 553-570, April.
- Nair, Harikesh S. & Chintagunta, Pradeep & Dube, Jean-Pierre, 2003.
"Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants,"
1948, Stanford University, Graduate School of Business.
- 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 (QME), Springer, vol. 2(1), pages 23-58, 03.
- Church, J. & Gandal, N., 1993.
"Strategic Entry Deterrence: Complementary Products as Installed Base,"
16-93, Tel Aviv.
- Church, Jeffrey & Gandal, Neil, 1996. "Strategic entry deterrence: Complementary products as installed base," European Journal of Political Economy, Elsevier, vol. 12(2), pages 331-354, September.
- Paul Milgrom & John Roberts, 1998.
"Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis,"
Levine's Working Paper Archive
245, David K. Levine.
- Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-59, March.
- Bruce H. Clark & David B. Montgomery, 1998. "Deterrence, Reputations, and Competitive Cognition," Management Science, INFORMS, vol. 44(1), pages 62-82, January.
- Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, vol. 99(394), pages 116-31, March.
- 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.
- Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
- Marco A. Haan, 2003. "Vaporware as a Means of Entry Deterrence," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 345-358, 09.
- Liikanen, Jukka & Stoneman, Paul & Toivanen, Otto, 2004. "Intergenerational effects in the diffusion of new technology: the case of mobile phones," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1137-1154, November.
- Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
- Shy, Oz, 1996. "Technology revolutions in the presence of network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 785-800, October.
- 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.
- Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
When requesting a correction, please mention this item's handle: RePEc:lmu:msmdpa:11499. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Debbie Claassen)
If references are entirely missing, you can add them using this form.