Indirect Network Effects and the Quality Dimension: A Look at the Gaming Industry
University of Colorado at Boulder
Indiana University - Kelley School of Business
May 1, 2013
There is a considerable debate among both practitioners and researchers on the relative importance of quality and network effects in high-tech industries. In this paper, we re-examine the interaction between software quality and indirect network effects in the classical static framework. Both theoretically and empirically, we provide the conditions under which variation in software quality generates larger (or smaller) indirect network effects than that predicted from the standard methodology that simply uses aggregate counts of software variety. 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 percent.
Number of Pages in PDF File: 40
Keywords: indirect network effects, vertical differentiation, video game industry
JEL Classification: L14, L82, M21working papers series
Date posted: December 30, 2012 ; Last revised: April 9, 2014
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