Will Consumers Be Willing to Pay More When Your Competitors Adopt Your Technology? The Impacts of the Supporting-Firm Base in Markets with Network Effects

Abstract

Network effects and standards competition introduce significant uncertainty into consumers’ new-product adoption decisions, creating a substantial challenge to the success of innovating firms. While the literature has highlighted the importance of establishing a large installed-user base (the number of users adopting the same product) in such markets, this paper draws attention to a different but potentially important market force: the supporting-firm base, which we define as the number of firms supporting the same technological standard. We propose a set of hypotheses concerning the impact of the supporting-firm base on consumers’ product valuation in the presence of network effects and standards competition. Our empirical analyses of disk drive markets show that, (1) Consumer product valuation is positively affected not only by the installed-user base but also by the supporting-firm base; (2) The two positive effects cannot be substituted, rather, the effort in building either would be less effective unless accompanied by the other; and (3) The impact of the supporting-firm base depends on not only its size but also the characteristics of the supporting-firms: consumers are affected more (a) by firms exclusively supporting a single standard than by firms supporting multiple standards, and (b) by incumbents than by new entrants.

Keywords: Network Effects, Installed Base, Supporting-Firm Base, Standards Competition, New Product Development