Does Quality Win? Network Effects versus Quality in High-Tech Markets

Abstract

Researchers disagree about the critical drivers of success in and efficiency of high-tech markets. On the one hand, a few researchers assert that high-tech markets are efficient with best quality brands dominating. On the other hand, many authors suspect that network effects lead to perverse markets in which the dominant brands do not have the best quality. We develop scenarios about the relative importance of these effects and the efficiency of markets. Empirical analysis of historical data on 19 categories shows that while both quality and network effects affect market share flows, markets are generally efficient. In particular, market share leadership changes often, switches in share leadership closely follow switches in quality leadership, and the best quality brands, not the first to enter, dominate the market. Network effects enhance the positive effect of quality.

Keywords: Network Effects, Tipping, Path Dependence, Quality, High-Tech Products