Software Exclusivity and the Scope of Indirect Network Effects in the U.S. Home Video Game Market

46 Pages Posted: 16 Nov 2007

See all articles by Kenneth S. Corts

Kenneth S. Corts

University of Toronto - Rotman School of Management

Mara Lederman

University of Toronto - Rotman School of Management

Date Written: November 2007

Abstract

This paper investigates the scope of indirect network effects in the home video game industry. We argue that the increasing prevalence of non-exclusive software gives rise to indirect network effects that exist between users of competing and incompatible hardware platforms. This is because software non-exclusivity, like hardware compatibility, allows a software firm to sell to a market broader than a single platform's installed base, leading to a dependence of any particular platform's software on all firms' installed bases. We look for evidence of these market-wide network effects by estimating a model of hardware demand and software supply. Our software supply equation allows the supply of games for a particular platform to depend not only on the installed base of that platform, but also on the installed base of competing platforms. Our results indicate the presence of both a platform-specific network effect and - in recent years - a cross-platform (or generation-wide) network effect. Our finding that the scope of indirect network effects in this industry has widened suggests one reason that this market, which is often cited as a canonical example of one with strong indirect network effects, is no longer dominated by a single platform.

Suggested Citation

Corts, Kenneth S. and Lederman, Mara, Software Exclusivity and the Scope of Indirect Network Effects in the U.S. Home Video Game Market (November 2007). NET Institute Working Paper No. 07-43, Available at SSRN: https://ssrn.com/abstract=1029856 or http://dx.doi.org/10.2139/ssrn.1029856

Kenneth S. Corts (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Mara Lederman

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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