Entry into Platform-Based Markets
40 Pages Posted: 2 Mar 2009
Date Written: February 27, 2009
Abstract
This paper seeks to understand when an entrant with superior quality can successfully enter a platform-based market. We analyze a model where an entrant platform with superior quality competes with an incumbent platform. We find that the entrant's success depends critically on the strength of indirect network effects and the consumers' discount factor of future applications. Contrary to the popular belief that an entrant's quality advantage needs to be sufficiently high to overcome the incumbent's installed-base advantage in such markets, we find that under certain conditions, an entrant with a small quality advantage can gain market share over time when competing with an incumbent with a huge installed-base advantage. To demonstrate the model's applicability, we examine the entry of the Xbox console into the video game industry. We find that Xbox has a small quality advantage over the incumbent, PlayStation 2, and the strength of indirect network effects and the consumers' discount factor in this market are such that PlayStation 2's huge installed-base advantage is unsustainable.
Keywords: platform-based markets, winner-take-all, platform competition, indirect network effects, video game industry
JEL Classification: L13, M21, O33
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Garth Saloner and Andrea Shepard
-
Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants
By Harikesh Nair, Pradeep K. Chintagunta, ...
-
Network Effects and Competition: An Empirical Analysis of the Home Video Game Industry
By Venkatesh Shankar and Barry L. Bayus
-
Indirect Network Effects and the Product Cycle: Video Games in the U.S., 1994-2002
-
The Dvd Versus Divx Standard War: Empirical Evidence of Network Effects and Preannouncement Effects
By David Dranove and Neil Gandal
-
The Role of Network Externalities in the U.S. Vcr Market in 1978-86
-
An Empirical Analysis of Indirect Network Effects in the Home Video Game Market
By James E. Prieger and Wei-min Hu
-
Indirect Network Effects in New Product Growth
By S. Stremersch, Gerard J. Tellis, ...