When Less Can Be More – Setting Technology Levels in Complementary Goods Markets

37 Pages Posted: 9 Jan 2014 Last revised: 27 Aug 2015

See all articles by Jörg Claussen

Jörg Claussen

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management); Copenhagen Business School - Department of Innovation and Organizational Economics

Christian Essling

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Tobias Kretschmer

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management); Centre for Economic Policy Research (CEPR)

Date Written: October 15, 2014

Abstract

Higher technological quality often directly translates into higher consumer utility. However, many new products require the availability of a complementary product. In such markets, releasing a technologically sophisticated product involves a tradeoff as it excludes consumers whose complementary products no longer function with the core product. Firms therefore have to balance product quality against market size. Technological change brings a dynamic perspective to this tradeoff as it renders existing technology obsolete but also increases performance of the complementary products, therefore increasing market potential. We study these mechanisms in the empirical context of computer games. In line with our expectations, we find an inverted U-shaped relationship between closeness to the frontier and sales revenues as well as differential effects of technological change depending on initial technological quality.

Keywords: Technological Frontier, Technological Change, Computer Games Industry

JEL Classification: L86, O30, L25

Suggested Citation

Claussen, Jörg and Essling, Christian and Kretschmer, Tobias, When Less Can Be More – Setting Technology Levels in Complementary Goods Markets (October 15, 2014). Research Policy, 44 (2), 2015, 328-339, Available at SSRN: https://ssrn.com/abstract=2376268 or http://dx.doi.org/10.2139/ssrn.2376268

Jörg Claussen (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Copenhagen Business School - Department of Innovation and Organizational Economics ( email )

Kilevej 14A
Frederiksberg, 2000
Denmark

Christian Essling

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

Tobias Kretschmer

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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