An Empirical Analysis of Consumer Purchase Behavior of Base Products and Add-ons Given Compatibility Constraints

Abstract

Despite the common practice of multiple standards in the high-technology product industry, there is a lack of knowledge on how compatibility between base products and add-ons affects consumer purchase decisions at the brand and/or standard level. We recognize the existence of compatibility constraints and develop a dynamic model in which a consumer makes periodic purchase decisions on whether to adopt/replace a base and/or an add-on product under the expectation of future price, quality, and compatibility. Dynamic and interactive inventory effects are included by allowing consumers to account for the long-term financial implications when planning to switch to a base product that is incompatible with their inventory of add-ons. Applying the model to the consumer purchase history of digital cameras and memory cards from 1998 to 2004, we demonstrate that the inventory of add-ons significantly affects the purchase of base products. This “lock-in” effect is enhanced when future prices of add-ons increase. Interestingly, it is more costly for consumers to switch from Sony to other brands than vice versa. In two policy simulations, we explore the impact of alternative compatibility policies. For example, if Sony had not created its proprietary Memory Stick, the market share of its cameras would have been reduced by 6 percentage points. This result provides important insights that leading brands and early movers should implement a proprietary standard.

Keywords: compatibility and standard, base product, add-on product, dynamic structural model, product adoption, product line pricing