Survival in Markets with Network Effects: Product Compatibility and Order-of-Entry Effects

Abstract:     
Although survival is a crucial performance concern for new products in markets with network effects due to high uncertainty and innovation risk in such markets, it has received scant academic attention. This paper investigates pioneers' survival (dis)advantage compared with their early followers in networked markets. We develop a conceptual framework suggesting that a pioneer's survival (dis)advantage is jointly affected by network effects and two fundamentally different types of product compatibility: (1) cross-generation compatibility, and (2) within-generation compatibility. Our empirical study, based on data from 45 markets, reveals some intriguing systematic patterns of contingency of pioneer survival advantage on the two types of compatibility. Specifically, in markets with very weak network effects, the two types of incompatibility affect the pioneer's survival advantage in opposite directions: Cross-generation incompatibility strengthens, but within-generation incompatibility weakens the pioneer's survival advantage. As network effects increase, however, the impact of both incompatibilities becomes weaker in their original directions, and eventually their directions are reversed. Despite the lower average survival duration of pioneers compared to their early followers in these markets, we find that pioneers can have a survival advantage in markets with both strong and weak network effects; however, the two cases require opposite compatibility conditions.

Keywords: Network Effects, Product Compatibility, Order-of-Entry Effects, Survival Analysis

JEL Classification: L10, M30

Accepted Paper Series