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Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market

Listed author(s):
  • Erik Brynjolfsson
  • Chris F. Kemerer

As an economic good, software has a number of interesting properties. In addition to the value of intrinsic features, the creation of or conformance to industry standards may be critical to the success of a product. This research builds and evaluates econometric models to determine which product features are important in the purchase and pricing decisions for microcomputer software. A special emphasis is to identify the effects of standards and network externalities. Four main results were found for the microcomputer spreadsheet market for the time period 1987-1992. Hedonic regression techniques can provide sensible estimates of the value users place on intrinsic features such as the ability to sort the data or to embed charts. Network externalities measurably influence the value of products. Each one percent increase in a product's installed base enables the product to command an additional $3.94 in price. Purchasers place significant value on adherence to standards. Products compatible with the Lotus menu tree interface earned a premium of approximately 305 of the average price in the sample. Shifts in technology platforms substantially change vendor premiums. Products manufactured by Lotus Development Corporation commanded a premium of $272 on the DOS platform, but only $65 on non-DOS platforms. The results of this research and the general model proposed can be used to estimate the relative values of software package features, adherence to standards, and increased market share. It also quantifies the opportunities created by changes in technology architecture. Finally, the results offer guidance into current public policy issues such as the value of intellectual property embodied in software.

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Paper provided by MIT Center for Coordination Science in its series Working Paper Series with number 158.

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Date of creation: Nov 1993
Handle: RePEc:wop:mitccs:158
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