Winners Take Some: The Impact of Conversion Technologies on Network Effects in Digital Goods Markets

Abstract:     
Contemporary users choosing a technology platform often run the risk of being stranded with a technology that becomes incompatible with a future dominant technology. The widely observed presence of network effects tends to exacerbate this consumer dilemma, as markets tend to "tip" towards a single, winner-take-all standard. This study seeks to show that such a dilemma can be solved in some circumstances for digital goods when conversion technologies are present.

The results from a duopoly model confirm that the existence of a converter can mediate the network effects of the pre-existing installed base. The conversion equilibrium is found to be more sustainable the higher the quality of conversion and the lower the conversion cost. Interestingly, both the entrant and the incumbent are shown to be better off by supplying a high quality converter. These findings have important implications for research and practice in adoption of new digital goods as the introduction of conversion technologies can reduce the social costs of standardization without compromising the benefits of network effects.

Keywords: Network Effects, Conversion Technologies, Compatibility, Technology Standards, Digital Goods, Network Externalities

JEL Classifications: C70, D43, D62, L11, L13

Working Paper Series