Indirect Network Effects and the Quality Dimension: A Look at the Gaming Industry
University of Colorado at Boulder
Indiana University - Kelley School of Business
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.
Number of Pages in PDF File: 30
Keywords: indirect network effects, vertical differentiation, video game industry
JEL Classification: L14, L82working papers series
Date posted: December 30, 2012 ; Last revised: December 9, 2013
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