Platform Performance Investment in the Presence of Network Externalities
Edward G. Anderson
University of Texas at Austin - Department of Information, Risk and Operations Management
September 21, 2013
Managers of emerging platforms must decide what level of platform performance to invest in at each product development cycle in markets that exhibit two-sided network externalities. High performance is a selling point for consumers, but in many cases it requires developers to make large investments to participate. Abstracting from an example drawn from the video game industry, we build a strategic model to investigate the trade-off between investing in high platform performance versus reducing investment in order to facilitate third party content development. We carry out a full analysis of three distinct settings: monopoly, price-setting duopoly, and price taking duopoly. We provide insights on the optimum investment in platform performance and demonstrate how conventional wisdom about product development may be misleading in the presence of strong cross-network externalities. In particular, we show that, contrary to the conventional wisdom about "winner-take-all" markets, heavily investing in the core performance of a platform does not always yield a competitive edge. We characterize the conditions under which offering a platform with lower performance but greater availability of content can be a winning strategy.
Number of Pages in PDF File: 50
Keywords: Two-sided markets, Network externality, Product development, Video game industry
JEL Classification: L1, M11, O32
Date posted: September 21, 2013
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