An Empirical Analysis of Indirect Network Effects in the Home Video Game Market

Abstract

We explore the indirect network effect in the market for home video games. We examine the video game console makers' strategic choice between increasing demand by lowering console price and by encouraging the growth of software variety. We also explore the existence of an applications barrier to entry in the console market, and find that there is little evidence for such a barrier. Finally, we assess the applicability of the model to out-of-sample situations, to look at whether our model and previous similar models can generalize to other markets for purposes of marketing or antitrust inquiry. We find that the model generalizes reasonably well to the Japanese market for the same generation of gaming systems, but poorly to previous generations in the US market.