The Effect of Superstar Software on Hardware Sales in System Markets

Abstract

Systems are composed of complementary products (e.g., video game systems are composed of the video game console and video games). Prior literature on indirect network effects argues that, in system markets, sales of the primary product (often referred to as "hardware") largely depend on the availability of complementary products (often referred to as "software"). Mathematical and empirical analyses have almost exclusively operationalized software availability as software quantity. However, while not substantiated with empirical evidence, case illustrations show that certain “superstar” software titles of very high quality (e.g., Super Mario 64) may have had disproportionately large effects on hardware unit sales (e.g., Nintendo N64 console sales). In the context of the U.S. home video game console market, we show that the introduction of a superstar increases video game console sales on average by 14%, over a period of 5 months. Software type does not consistently alter this effect. Our findings imply that scholars who study the relationship between software availability and hardware sales, need to account for superstar returns, and their decaying effect over time, over and above a mere software quantity effect. Hardware firms should maintain a steady flow of superstar introductions, as the positive effect of a superstar only lasts for 5 months, and make, if need be, side-payments to software firms, as superstars dramatically increase hardware sales. Obtaining exclusivity over superstars, by hardware firms, does not provide an extra boost to their own sales, but it does take away an opportunity for competing systems to increase their sales.

Keywords: system markets, superstars, indirect network effects, new product introductions, software, hardware, video game industry

JEL Classification: C44, M31, M, D2