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

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Jin-Hyuk Kim & Jeffrey T. Prince & Calvin Qiu, 2013. "Indirect Network Effects and the Quality Dimension: A Look at the Gaming Industry," Working Papers 2013-10, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    • Handle: RePEc:iuk:wpaper:2013-10
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    Cited by:

    1. Yuki Inoue, 2019. "Winner-Takes-All or Co-Evolution among Platform Ecosystems: A Look at the Competitive and Symbiotic Actions of Complementors," Sustainability, MDPI, vol. 11(3), pages 1-25, January.
    2. Jianyue Liu & Zhiqiang Ma, 2023. "Optimal quality regulation on the online health platform," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-17, December.
    3. 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).
    4. Jukka Ruohonen & Sami Hyrynsalmi, 2017. "Evaluating the use of internet search volumes for time series modeling of sales in the video game industry," Electronic Markets, Springer;IIM University of St. Gallen, vol. 27(4), pages 351-370, November.
    5. Huotari, Pontus & Järvi, Kati & Kortelainen, Samuli & Huhtamäki, Jukka, 2017. "Winner does not take all: Selective attention and local bias in platform-based markets," Technological Forecasting and Social Change, Elsevier, vol. 114(C), pages 313-326.
    6. Thanh Doan & Fabio Maria Manenti & Franco Mariuzzo, 2020. "Platform competition in the tablet PC market: The effect of application quality," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2020-08, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    7. Guangyu Cao & Ginger Zhe Jin & Xi Weng & Li‐An Zhou, 2021. "Market‐expanding or Market‐stealing? Competition with network effects in bike‐sharing," RAND Journal of Economics, RAND Corporation, vol. 52(4), pages 778-814, December.
    8. 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.
    9. Claudio Panico & Carmelo Cennamo, 2022. "User preferences and strategic interactions in platform ecosystems," Strategic Management Journal, Wiley Blackwell, vol. 43(3), pages 507-529, March.
    10. 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.
    11. Thanh Doan & Fabio Maria Manenti & Franco Mariuzzo, 2022. "Apple iOS is a closed platform; Google Android is open. In this paper, we combine tablet-level data with data on the quality of the top 1000 mobile applications from these platforms and estimate a str," "Marco Fanno" Working Papers 0266, Dipartimento di Scienze Economiche "Marco Fanno".
    12. Peng Huang & Gaoyan Lyu & Yi Xu, 2022. "Quality Regulation on Two-Sided Platforms: Exclusion, Subsidization, and First-Party Applications," Management Science, INFORMS, vol. 68(6), pages 4415-4434, June.
    13. Rietveld, G.J. & Eggers, J.P., 2016. "Demand Heterogeneity and the Adoption of Platform Complements," ERIM Report Series Research in Management ERS-2016-003-STR, 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. Koski, Heli & Kässi, Otto & Braesemann, Fabian, 2020. "Killers on the Road of Emerging Start-ups – Implications for Market Entry and Venture Capital Financing," ETLA Working Papers 81, The Research Institute of the Finnish Economy.
    15. Li, Xiaonan & Li, Xiangyong & Wang, Hai & Shi, Junxin & Aneja, Y.P., 2022. "Supply regulation under the exclusion policy in a ride-sourcing market," Transportation Research Part B: Methodological, Elsevier, vol. 166(C), pages 69-94.
    16. Doan, Thanh & Manenti, Fabio M. & Mariuzzo, Franco, 2023. "Platform competition in the tablet PC market: The effect of application quality," International Journal of Industrial Organization, Elsevier, vol. 88(C).

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    More about this item

    Keywords

    indirect network effects; vertical differentiation; video game industry;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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