Indirect Network Effects and the Quality Dimension: A Look at the Gaming Industry

41 Pages Posted: 30 Dec 2012 Last revised: 29 Jul 2014

Jin-Hyuk Kim

University of Colorado at Boulder

Jeffrey Prince

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Calvin Qiu

ICF GHK

Date Written: May 1, 2013

Abstract

Two-sided markets consist of platforms that need to bring both retail consumers and complementary goods producers on board to be successful. Consumer adoption of these platforms can often hinge on the presence and magnitude of indirect network effects – the positive feedback loop where a larger base of adopters of a primary product (“hardware”) creates a larger market for complementary goods (“software”), which in turn increases the value of the primary good. Prior work attempting to measure indirect network effects often uses aggregate counts of software variety to do so. In this paper, we illustrate the importance of accounting for variation in software quality – a feature present in many markets – when conducting this measurement, and provide the conditions under which not doing so results in over- or under-estimation of the actual indirect network effect. We apply our framework to the 7th-generation video game console market with quality-differentiated titles and show that in this market the use of aggregate software measures underestimates the indirect network effects by approximately 30 percent.

Keywords: indirect network effects, vertical differentiation, video game industry

JEL Classification: L14, L82, M21

Suggested Citation

Kim, Jin-Hyuk and Prince, Jeffrey and Qiu, Calvin, Indirect Network Effects and the Quality Dimension: A Look at the Gaming Industry (May 1, 2013). Available at SSRN: https://ssrn.com/abstract=2194662 or http://dx.doi.org/10.2139/ssrn.2194662

Jin-Hyuk Kim

University of Colorado at Boulder ( email )

Campus Box 256
Boulder, CO 80309
United States

Jeffrey Prince (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

Calvin Qiu

ICF GHK ( email )

No Address Available

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