Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants

Quantitavtive Marketing and Economics, Vol. 2, No. 1, pp. 23-58, 2004

Stanford University Graduate School of Business Research Paper No. 1948

44 Pages Posted: 22 Jul 2003

See all articles by Harikesh Nair

Harikesh Nair

Stanford University - Graduate School of Business

Pradeep K. Chintagunta

University of Chicago

Jean-Pierre Dubé

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

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Abstract

We present a framework to measure empirically the size of indirect network effects in high-technology markets with competing incompatible technology standards. These indirect network effects arise due to inter-dependence in demand for hardware and compatible software. By modeling the joint determination of hardware sales and software availability in the market, we are able to describe the nature of demand inter-dependence and to measure the size of the indirect network effects. We apply the model to price and sales data from the industry for Personal Digital Assistants (PDAs) along with the availability of software titles compatible with each PDA hardware standard. Our empirical results indicate significant indirect network effects. By July 2002, the network effect explains roughly 22% of the log-odds ratio of the sales of all Palm O/S compatible PDA-s to Microsoft O/S compatible PDA-s, where the remaining 78% reflects price and model features. We also use our model estimates to study the growth of the installed bases of Palm and Microsoft PDA hardware, with and without the availability of compatible third party software. We find that lack of third party software negatively impacts the evolution of the installed hardware bases of both formats. These results suggest PDA hardware firms would benefit from investing resources in increasing the provision of software for their products. We then compare the benefits of investments in software with investments in the quality of hardware technology. This exercise helps disentangle the potential for incremental hardware sales due to hardware quality improvement from that of positive feedback due to market software provision.

Keywords: high-technology products, indirect network effects, positive feedback, endogeneity, econometrics, economic policy, empirical industrial organization, market research, marketing strategy, product management

JEL Classification: C10, L10, M3, O32

Suggested Citation

Nair, Harikesh and Chintagunta, Pradeep K. and Dube, Jean-Pierre H., Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants. Quantitavtive Marketing and Economics, Vol. 2, No. 1, pp. 23-58, 2004; Stanford University Graduate School of Business Research Paper No. 1948. Available at SSRN: https://ssrn.com/abstract=408280 or http://dx.doi.org/10.2139/ssrn.408280

Harikesh Nair (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
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650-736-4256 (Phone)

HOME PAGE: http://faculty-gsb.stanford.edu/nair/index.html

Pradeep K. Chintagunta

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)

Jean-Pierre H. Dube

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://gsb.uchicago.edu/fac/jean-pierre.dube

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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