Indirect network effects and the quality dimension: A look at the gaming industry |
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| Institution: | 1. Department of Economics, University of Colorado at Boulder, 256 UCB, Boulder, CO 80309, USA;2. Kelley School of Business, Indiana University, 1309 E. Tenth Street, Bloomington, IN 47405, USA;3. ICF International, 19/F Heng Shan Centre, 145 Queen''s Road East, Wan Chai, Hong Kong;1. Department of Economics, University of Bristol, 8 Woodland Road, Bristol BS8 1TN, UK;2. Toulouse School of Economics, Manufacture des Tabacs, 21 allée de Brienne, 31015 Toulouse Cedex 6, France;3. Department of Economics, University College London, Drayton House, 30 Gordon Street, London WC1H 0AX, UK;4. Institute for Fiscal Studies, London, UK;5. Sciences Po, Paris, France;1. Université Paris Dauphine and Ecole Polytechnique, France;2. EQUIPPE Faculté des Sciences Economiques et Sociales de Lille and MINES ParisTech, PSL — Research University, CERNA — Center for Industrial Economics, France;1. Harvard University (HBS Strategy Unit), United States;2. Toulouse School of Economics (IDEI & CNRS-GREMAQ), France;1. European Commission, DG Comp, Belgium;2. Imperial College London, United Kingdom;3. University of Rome Tor Vergata, Italy;1. Department of Economics, University of Michigan, 611 Tappan Street, Ann Arbor, MI 48109, United States;2. School of International Business Administration, Shanghai University of Finance and Economics, Shanghai, China;3. School of Economics and Management, Tsinghua University, Beijing, China;4. Eller College of Management, University of Arizona, 1130 East Helen Street, Tucson, AZ 85721, United States |
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| Abstract: | Two-sided markets consist of platforms that need to bring both retail consumers and complementary goods producers on board to be successful. Consumer adoption of these platforms can often hinge on the presence and magnitude of indirect network effects — the positive feedback loop where a larger base of adopters of a primary product (“hardware”) creates a larger market for complementary goods (“software”), which in turn increases the value of the primary good. Prior work attempting to measure indirect network effects often uses aggregate counts of software variety to do so. In this paper, we illustrate the importance of accounting for variation in software quality — a feature present in many markets — when conducting this measurement, and provide the conditions under which not doing so results in over- or underestimation of the actual indirect network effect. We apply our framework to the 7th-generation video game console market with quality-differentiated titles and show that in this market the use of aggregate software measures underestimates the indirect network effects by approximately 30%. |
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