Strategic Management Journal
Strat. Mgmt. J., 24: 375–384 (2003)
Published online 18 November 2002 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.296
RESEARCH NOTES AND COMMENTARIES
NETWORK EFFECTS AND COMPETITION: AN
EMPIRICAL ANALYSIS OF THE HOME VIDEO GAME
VENKATESH SHANKAR1 and BARRY L. BAYUS2 *
Robert H. Smith School of Business, University of Maryland, College Park, Maryland, U.S.A.
Kenan-Flagler Business School, University of North Carolina, Chapel Hill, North Carolina, U.S.A.
Building on the resource-based view of the firm, we advance the idea that a firm’s customer network can be a strategic asset. We suggest that network effects are a function of network size (i.e., installed customer base) and network strength (i.e., the marginal impact of a unit increase in network size on demand). We empirically study these network effects in the 16bit home video game industry in which the dominant competitors were Nintendo and Sega. In the spirit of the new empirical IO framework, we estimate a structural econometric model assuming the data are equilibrium outcomes of the best fitting noncooperative game in price and advertising. After controlling for other effects, we find strong evidence that network effects are asymmetric between the competitors in the home video game industry. Specifically, we find that the firm with a smaller customer network (Nintendo) has higher network strength than the firm with the larger customer base (Sega). Thus, our results provide a possible explanation for this situation in which the firm with a smaller customer network (Nintendo) was able to overtake the sales of a firm with a larger network size (Sega). Copyright 2002 John Wiley & Sons, Ltd.
In many industries, the network of consumers
using compatible products or services influences
the benefits of consumption. Positive network
effects arise when the consumer utility of using
a product or service increases with the number
of users of that product or service. The telephone system is a widely used example since Key words: network externalities; technology lock-in;
new empirical industrial organization
*Correspondence to: Barry L. Bayus, Kenan-Flagler Business
School, University of North Carolina, CB3490, Chapel Hill,
NC 27599, U.S.A.
Copyright 2002 John Wiley & Sons, Ltd.
it seems clear that the value of being part of
the network rises as the network size increases.
Consumption benefits can also arise in markets
where a large customer network leads to increases
in complementary products and services, which
in turn leads to increased consumer utility (e.g.,
see Farrell and Saloner, 1985; Katz and Shapiro,
1985). Prominent examples of industries thought
to exhibit network effects include automated bank
teller machines, computer hardware and software,
videocassette recorders, video games, and Internet
web browsers. Not surprisingly, network externalities and the implications of having a large installed customer base are receiving increased
Received 3 November 1999
Final revision received 14 August 2002
V. Shankar and B. L. Bayus
attention by strategy researchers (e.g., Hill, 1997;
As noted by Majumdar and Venkataraman
(1998), the literature related to network effects
broadly tackles three categories of research questions: (1) technology adoption decisions (e.g., what factors are related to whether and when a new
technology is adopted); (2) technology compatibility decisions (e.g., what factors influence a firm’s decision to seek compatibility); and (3) decisions
among competing incompatible technologies (e.g.,
what factors are related to consumers’ choices
among rival incompatible products within a single
product category). While theoretical research has
addressed all three of these categories, empirical
research has been limited to the first and second
categories of questions (e.g., see the review by...
Please join StudyMode to read the full document