IDEAS home Printed from https://ideas.repec.org/a/inm/orstsc/v1y2016i2p90-104.html
   My bibliography  Save this article

Generational Transitions in Platform Markets—The Role of Backward Compatibility

Author

Listed:
  • Tobias Kretschmer

    (Institute for Strategy, Technology and Organization, and Organizations Research Group, Ludwig-Maximilians-Universität Munich, Munich 80539, Germany)

  • Jörg Claussen

    (Copenhagen Business School, Department of Innovation and Organizational Economics, Frederiksberg 2000, Denmark)

Abstract

The introduction of a new product generation forces incumbents in platform markets to rebuild their installed base of complementary products. Using three different data sets on the U.S. market for video game consoles, we show that incumbents can, to some extent, substitute for rebuilding their new installed base by making their new products backward compatible, which lets them draw on the installed base of software for the parent generation. However, while this positive direct effect of backward compatibility dominates in our setting, we also observe a (weaker) negative indirect effect working through the reduced supply of new software. We find that both effects are moderated by the age of the new technological generation and by the technological leap between generations: backward compatibility becomes less important with increasing console age and larger technological improvement between generations.

Suggested Citation

  • Tobias Kretschmer & Jörg Claussen, 2016. "Generational Transitions in Platform Markets—The Role of Backward Compatibility," Strategy Science, INFORMS, vol. 1(2), pages 90-104, June.
    • Handle: RePEc:inm:orstsc:v:1:y:2016:i:2:p:90-104
    DOI: 10.1287/stsc.2015.0009
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/stsc.2015.0009
    Download Restriction: no
    File URL: https://libkey.io/10.1287/stsc.2015.0009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Kim, Jeong-Yoo, 2002. "Product compatibility as a signal of quality in a market with network externalities," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 949-964, September.
    2. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
    3. Farrell, Joseph & Saloner, Garth, 1992. "Converters, Compatibility, and the Control of Interfaces," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 9-35, March.
    4. 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.
    5. Margarethe F. Wiersema & Harry P. Bowen, 2009. "The use of limited dependent variable techniques in strategy research: issues and methods," Strategic Management Journal, Wiley Blackwell, vol. 30(6), pages 679-692, June.
    6. 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.
    7. Matthew T. Clements & Hiroshi Ohashi, 2005. "Indirect Network Effects And The Product Cycle: Video Games In The U.S., 1994–2002," Journal of Industrial Economics, Wiley Blackwell, vol. 53(4), pages 515-542, December.
    8. Neil Gandal & Michael Kende & Rafael Rob, 2000. "The Dynamics of Technological Adoption in Hardware/Software Systems: The Case of Compact Disc Players," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 43-61, Spring.
    9. Neil Jones, 2003. "Competing after radical technological change: the significance of product line management strategy," Strategic Management Journal, Wiley Blackwell, vol. 24(13), pages 1265-1287, December.
    10. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    11. John M. de Figueiredo & Brian S. Silverman, 2007. "Churn, Baby, Churn: Strategic Dynamics Among Dominant and Fringe Firms in a Segmented Industry," Management Science, INFORMS, vol. 53(4), pages 632-650, April.
    12. James Wade, 1995. "Dynamics of organizational communities and technological bandwagons: An empirical investigation of community evolution in the microprocessor market," Strategic Management Journal, Wiley Blackwell, vol. 16(S1), pages 111-133.
    13. Pao‐Lien Chen & Charles Williams & Rajshree Agarwal, 2012. "Growing pains: Pre‐entry experience and the challenge of transition to incumbency," Strategic Management Journal, Wiley Blackwell, vol. 33(3), pages 252-276, March.
    14. Vish Krishnan & Karthik Ramachandran, 2011. "Integrated Product Architecture and Pricing for Managing Sequential Innovation," Management Science, INFORMS, vol. 57(11), pages 2040-2053, November.
    15. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
    16. 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, March.
    17. Frank T. Rothaermel & Warren Boeker, 2008. "Old technology meets new technology: complementarities, similarities, and alliance formation," Strategic Management Journal, Wiley Blackwell, vol. 29(1), pages 47-77, January.
    18. Tobias Kretschmer, 2008. "Splintering And Inertia In Network Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 56(4), pages 685-706, December.
    19. Raphael Amit, 1986. "Cost leadership strategy and experience curves," Strategic Management Journal, Wiley Blackwell, vol. 7(3), pages 281-292, May.
    20. 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.
    21. Claussen, Jörg & Essling, Christian & Kretschmer, Tobias, 2015. "When less can be more – Setting technology levels in complementary goods markets," Research Policy, Elsevier, vol. 44(2), pages 328-339.
    22. Shy, Oz, 1996. "Technology revolutions in the presence of network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 785-800, October.
    23. 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.
    24. J.P. Eggers, 2012. "All experience is not created equal: learning, adapting, and focusing in product portfolio management," Strategic Management Journal, Wiley Blackwell, vol. 33(3), pages 315-335, March.
    25. 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.
    26. Mary Tripsas, 1997. "Unraveling The Process Of Creative Destruction: Complementary Assets And Incumbent Survival In The Typesetter Industry," Strategic Management Journal, Wiley Blackwell, vol. 18(S1), pages 119-142, July.
    27. Choi, Jay Pil, 1996. "Do converters facilitate the transition to a new incompatible technology? A dynamic analysis of converters," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 825-835, October.
    28. Shane M. Greenstein, 1993. "Did Installed Base Given an Incumbent Any (Measurable) Advantages in Federal Computer Procurement?," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 19-39, Spring.
    29. Sachin Gupta & Dipak C. Jain & Mohanbir S. Sawhney, 1999. "Modeling the Evolution of Markets with Indirect Network Externalities: An Application to Digital Television," Marketing Science, INFORMS, vol. 18(3), pages 396-416.
    30. Edward G. Anderson & Geoffrey G. Parker & Burcu Tan, 2014. "Platform Performance Investment in the Presence of Network Externalities," Information Systems Research, INFORMS, vol. 25(1), pages 152-172, March.
    31. Ron Adner & Rahul Kapoor, 2010. "Value creation in innovation ecosystems: how the structure of technological interdependence affects firm performance in new technology generations," Strategic Management Journal, Wiley Blackwell, vol. 31(3), pages 306-333, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Roberto Fontana & Shane Greenstein, 2020. "Centrino and the Restructuring of WI-FI Supply," NBER Working Papers 27754, National Bureau of Economic Research, Inc.
    2. Carmelo Cennamo & Hakan Ozalp & Tobias Kretschmer, 2018. "Platform Architecture and Quality Trade-offs of Multihoming Complements," Information Systems Research, INFORMS, vol. 29(2), pages 461-478, June.
    3. Liang Chen & Pengxiang Zhang & Sali Li & Scott F. Turner, 2022. "Growing pains: The effect of generational product innovation on mobile games performance," Strategic Management Journal, Wiley Blackwell, vol. 43(4), pages 792-821, April.
    4. Yuchen Zhang & Jingjing Li & Tony W. Tong, 2022. "Platform governance matters: How platform gatekeeping affects knowledge sharing among complementors," Strategic Management Journal, Wiley Blackwell, vol. 43(3), pages 599-626, March.
    5. Pundziene, Asta & Gerulaitiene, Neringa & Bez, Sea Matilda & Georgescu, Irène & Mathieu, Christopher & Carrabina-Bordoll, Jordi & Rialp-Criado, Josep & Nieminen, Hannu & Varri, Alpo & Boethius, Susann, 2023. "Value capture and embeddedness in social-purpose-driven ecosystems. A multiple-case study of European digital healthcare platforms," Technovation, Elsevier, vol. 124(C).
    6. Yuki Inoue & Masataka Hashimoto & Takeshi Takenaka, 2019. "Effectiveness of Ecosystem Strategies for the Sustainability of Marketplace Platform Ecosystems," Sustainability, MDPI, vol. 11(20), pages 1-33, October.
    7. Tobias Kretschmer, 2022. "In Pursuit of Fairness? Infrastructure Investment in Digital Markets," CESifo Working Paper Series 10013, CESifo.
    8. Nico Wiegand & Yuri Peers & Alexander Bleier, 2023. "Software multihoming to distal markets: Evidence of cannibalization and complementarity in the video game console industry," Journal of the Academy of Marketing Science, Springer, vol. 51(2), pages 393-417, March.
    9. Feng Zhu & Qihong Liu, 2018. "Competing with complementors: An empirical look at Amazon.com," Strategic Management Journal, Wiley Blackwell, vol. 39(10), pages 2618-2642, October.
    10. Appio, Francesco Paolo & Lima, Marcos & Paroutis, Sotirios, 2019. "Understanding Smart Cities: Innovation ecosystems, technological advancements, and societal challenges," Technological Forecasting and Social Change, Elsevier, vol. 142(C), pages 1-14.
    11. Tobias Kretschmer & Aija Leiponen & Melissa Schilling & Gurneeta Vasudeva, 2022. "Platform ecosystems as meta‐organizations: Implications for platform strategies," Strategic Management Journal, Wiley Blackwell, vol. 43(3), pages 405-424, March.
    12. Raghu Garud & Arun Kumaraswamy & Anna Roberts & Le Xu, 2022. "Liminal movement by digital platform‐based sharing economy ventures: The case of Uber Technologies," Strategic Management Journal, Wiley Blackwell, vol. 43(3), pages 447-475, March.
    13. Timothy Simcoe & Jeremy Watson, 2019. "Forking, Fragmentation, and Splintering," Strategy Science, INFORMS, vol. 4(4), pages 283-297, December.
    14. Jan Frederic Nerbel & Markus Kreutzer, 2023. "Digital platform ecosystems in flux: From proprietary digital platforms to wide-spanning ecosystems," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-20, December.
    15. Henning Piezunka & Thorsten Grohsjean, 2023. "Collaborations that hurt firm performance but help employees’ careers," Strategic Management Journal, Wiley Blackwell, vol. 44(3), pages 778-811, March.
    16. Sebastian Wai, 2022. "Software quality and backward compatibility in the video game industry," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 49(3), pages 545-570, September.
    17. Moshe A. Barach & Aseem Kaul & Ming D. Leung & Sibo Lu, 2019. "Strategic Redundancy in the Use of Big Data: Evidence from a Two-Sided Labor Market," Strategy Science, INFORMS, vol. 4(4), pages 298-322, December.
    18. Wesley W. Koo & Charles E. Eesley, 2021. "Platform governance and the rural–urban divide: Sellers' responses to design change," Strategic Management Journal, Wiley Blackwell, vol. 42(5), pages 941-967, May.
    19. Joost Rietveld & Joe N. Ploog, 2022. "On top of the game? The double‐edged sword of incorporating social features into freemium products," Strategic Management Journal, Wiley Blackwell, vol. 43(6), pages 1182-1207, June.
    20. Roberto Fontana & Shane Greenstein, 2021. "Platform leadership and supply chains: Intel, Centrino, and the restructuring of Wi‐Fi supply," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(2), pages 259-286, May.
    21. Chen, Feng & Xu, Su Xiu & Ning, Yu & Ji, Xiang & Ren, Yaping, 2024. "Compatible electric vehicle charging service: Blessing or curse?," Journal of Retailing and Consumer Services, Elsevier, vol. 79(C).
    22. Richard T. Gretz & Ashwin Malshe & Carlos Bauer & Suman Basuroy, 2019. "The impact of superstar and non-superstar software on hardware sales: the moderating role of hardware lifecycle," Journal of the Academy of Marketing Science, Springer, vol. 47(3), pages 394-416, May.
    23. Kevin J. Boudreau & Lars Bo Jeppesen & Milan Miric, 2022. "Competing on freemium: Digital competition with network effects," Strategic Management Journal, Wiley Blackwell, vol. 43(7), pages 1374-1401, July.
    24. Inoue, Yuki, 2021. "Indirect innovation management by platform ecosystem governance and positioning: Toward collective ambidexterity in the ecosystems," Technological Forecasting and Social Change, Elsevier, vol. 166(C).
    25. Constance E. Helfat & Aseem Kaul & David J. Ketchen & Jay B. Barney & Olivier Chatain & Harbir Singh, 2023. "Renewing the resource‐based view: New contexts, new concepts, and new methods," Strategic Management Journal, Wiley Blackwell, vol. 44(6), pages 1357-1390, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Claussen, Jörg & Kretschmer, Tobias & Spengler, Thomas, 2010. "Market leadership through technology – Backward compatibility in the U.S. Handheld Video Game Industry," Discussion Papers in Business Administration 12716, University of Munich, Munich School of Management.
    2. Claussen, Jörg & Kretschmer, Tobias & Spengler, Thomas, 2010. "Backward Compatibility to Sustain Market Dominance – Evidence from the US Handheld Video Game Industry," Discussion Papers in Business Administration 11499, University of Munich, Munich School of Management.
    3. Daniel Birke, 2009. "The Economics Of Networks: A Survey Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 762-793, September.
    4. Rodolphe Durand & Robert M. Grant & Tammy L. Madsen & David P. McIntyre & Arati Srinivasan, 2017. "Networks, platforms, and strategy: Emerging views and next steps," Strategic Management Journal, Wiley Blackwell, vol. 38(1), pages 141-160, January.
    5. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, January.
    6. Knittel Christopher R. & Stango Victor, 2008. "Incompatibility, Product Attributes and Consumer Welfare: Evidence from ATMs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-42, January.
    7. Garcia-Swartz, Daniel D. & Garcia-Vicente, Florencia, 2015. "Network effects on the iPhone platform: An empirical examination," Telecommunications Policy, Elsevier, vol. 39(10), pages 877-895.
    8. Kim, Jin-Hyuk & Prince, Jeffrey & Qiu, Calvin, 2014. "Indirect network effects and the quality dimension: A look at the gaming industry," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 99-108.
    9. Kang, Jin-Su & Downing, Stephen, 2015. "Keystone effect on entry into two-sided markets: An analysis of the market entry of WiMAX," Technological Forecasting and Social Change, Elsevier, vol. 94(C), pages 170-186.
    10. Steiner, Michael & Wiegand, Nico & Eggert, Andreas & Backhaus, Klaus, 2016. "Platform adoption in system markets: The roles of preference heterogeneity and consumer expectations," International Journal of Research in Marketing, Elsevier, vol. 33(2), pages 276-296.
    11. Gautam Gowrisankaran & Minsoo Park & Marc Rysman, 2010. "Estimating Network Effects in a Dynamic Environment," Working Papers 10-03, NET Institute, revised May 2010.
    12. Ewald Scherm & Christian Maaß, 2006. "Zum Stellenwert der Netzwerkökonomik in der Strategie-/Marketingforschung —Eine Analyse empirischer Untersuchungen," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 17(1), pages 27-46, March.
    13. Stremersch, S. & Tellis, G.J. & Franses, Ph.H.B.F. & Binken, J.L.G., 2007. "Indirect Network Effects in New Product Growth," ERIM Report Series Research in Management ERS-2007-019-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.
    14. Richard T. Gretz & Ashwin Malshe & Carlos Bauer & Suman Basuroy, 2019. "The impact of superstar and non-superstar software on hardware sales: the moderating role of hardware lifecycle," Journal of the Academy of Marketing Science, Springer, vol. 47(3), pages 394-416, May.
    15. Fournel, Jean-François, 2023. "Electric Vehicle Subsidies: Cost-Effectiveness and Emission Reductions," TSE Working Papers 23-1465, Toulouse School of Economics (TSE).
    16. 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.
    17. Edward G. Anderson & Geoffrey G. Parker & Burcu Tan, 2014. "Platform Performance Investment in the Presence of Network Externalities," Information Systems Research, INFORMS, vol. 25(1), pages 152-172, March.
    18. Pinar Karaca-Mandic, 2011. "Role of complementarities in technology adoption: The case of DVD players," Quantitative Marketing and Economics (QME), Springer, vol. 9(2), pages 179-210, June.
    19. Doan, Thanh & Manenti, Fabio M. & Mariuzzo, Franco, 2023. "Reprint of: Platform competition in the tablet PC market: The effect of application quality," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    20. JP Eggers & Michal Grajek & Tobias Kretschmer, 2011. "Performance implications of core and complementary pre-entry experience: The role of consumer heterogeneity in mobile telephony," ESMT Research Working Papers ESMT-11-03 (R2), ESMT European School of Management and Technology, revised 29 May 2012.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:orstsc:v:1:y:2016:i:2:p:90-104. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.