Abstract

http://ssrn.com/abstract=2329217
 
 

Citations (2)



 


 



Platform Performance Investment in the Presence of Network Externalities


Edward G. Anderson


University of Texas at Austin - Department of Information, Risk and Operations Management

Geoffrey Parker


Tulane University - A.B. Freeman School of Business

Burcu Tan


Tulane University

September 21, 2013


Abstract:     
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

working papers series


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Date posted: September 21, 2013  

Suggested Citation

Anderson, Edward G. and Parker, Geoffrey and Tan, Burcu, Platform Performance Investment in the Presence of Network Externalities (September 21, 2013). Available at SSRN: http://ssrn.com/abstract=2329217 or http://dx.doi.org/10.2139/ssrn.2329217

Contact Information

Edward G. Anderson
University of Texas at Austin - Department of Information, Risk and Operations Management ( email )
CBA 5.202
Austin, TX 78712
United States
512-471-6394 (Phone)
512-471-3937 (Fax)
Geoffrey Parker (Contact Author)
Tulane University - A.B. Freeman School of Business ( email )
7 McAlister Drive
New Orleans, LA 70118
United States
504-865-5000 (Phone)
504-865-6751 (Fax)
HOME PAGE: http://ggparker.net
Burcu Tan
Tulane University ( email )
New Orleans, LA 70118
United States
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