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Software Exclusivity and the Scope of Indirect Network Effects in the U.S. Home Video Game Market

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, leading to a dependence of any particular platform’s software on all firms’ installed bases. We look for evidence of these 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.netinst.org/Corts-Lederman.pdf
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Paper provided by NET Institute in its series Working Papers with number 07-43.

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Length: 46
Date of creation: Nov 2007
Date of revision: Nov 2007
Handle: RePEc:net:wpaper:0743
Contact details of provider: Web page: http://www.NETinst.org/

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  1. Gandal, N. & Kende, M. & Rob, R., 1997. "The Dynamics of Technological Adoption in Hardware/Software Systems: The Case of Compact Disc Players," Papers 21-97, Tel Aviv.
  2. Hiroshi Ohashi, 2003. "The Role of Network Effects in the US VCR Market, 1978-1986," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(4), pages 447-494, December.
  3. Hall, Bronwyn H. & Mairesse, Jacques & Turner, Laure, 2006. "Identifying Age, Cohort and Period Effects in Scientific Research Productivity - Discussion and Illustration Using Simulated and Actual Data on French Physicists," MERIT Working Papers 042, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  4. Ravi Mantena & Ramesh Sankaranarayanan & Siva Viswanathan, 2007. "“Exclusive Licensing in Complementary Network Industries”," Working Papers 07-04, NET Institute, revised Apr 2007.
  5. Mark Armstrong, 2005. "Competition in Two-Sided Markets," Industrial Organization 0505009, EconWPA.
  6. 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.
  7. Kaiser, Ulrich & Wright, Julian, 2006. "Price structure in two-sided markets: Evidence from the magazine industry," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 1-28, January.
  8. 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.
  9. Matthew T. Clements & Hiroshi Ohashi, 2004. "Indirect Network Effects and the Product Cycle: Video Games in the U.S., 1994-2002," CIRJE F-Series CIRJE-F-261, CIRJE, Faculty of Economics, University of Tokyo.
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