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

Posted: 8 Jan 2004

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 PDAs to Microsoft O/S compatible PDAs, 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

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. Quantitative Marketing and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=484361

Harikesh Nair (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
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 )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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