Tipping and Concentration in Markets with Indirect Network Effects

47 Pages Posted: 21 Jan 2008 Last revised: 11 Aug 2008

Jean-Pierre Dubé

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Günter J. Hitsch

University of Chicago - Booth School of Business

Pradeep K. Chintagunta

University of Chicago

Date Written: July 14, 2008

Abstract

This paper develops a framework to measure "tipping" - the increase in a firm's market share dominance caused by indirect network effects. Our measure compares the expected concentration in a market to the hypothetical expected concentration that would arise in the absence of indirect network effects. In practice, this measure requires a model that can predict the counter-factual market concentration under different parameter values capturing the strength of indirect network effects. We build such a model for the case of dynamic standards competition in a market characterized by the classic hardware/software paradigm. To demonstrate its applicability, we calibrate it using demand estimates and other data from the 32/64-bit generation of video game consoles, a canonical example of standards competition with indirect network effects. In our example, we find that indirect network effects can lead to a strong, economically significant increase in market concentration. We also find important roles for beliefs on both the demand side, as consumer's tend to pick the product they expect to win the standards war, and on the supply side, as firms engage in penetration pricing to invest in growing their networks.

Keywords: Dynamic Oligopoly, network effects, antitrust, concentration, durable goods, penetration pricing

JEL Classification: L13, L41, M31

Suggested Citation

Dubé, Jean-Pierre and Hitsch, Günter J. and Chintagunta, Pradeep K., Tipping and Concentration in Markets with Indirect Network Effects (July 14, 2008). Chicago GSB Research Paper No. 08-08. Available at SSRN: https://ssrn.com/abstract=1085909 or http://dx.doi.org/10.2139/ssrn.1085909

Jean-Pierre H. Dube (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://gsb.uchicago.edu/fac/jean-pierre.dube

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Guenter J. Hitsch

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Pradeep K. Chintagunta

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)

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