Shankar Et Al 2003 Strategic Management Journal
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
INDUSTRY
VENKATESH SHANKAR1 and BARRY L. BAYUS2 *
1
Robert H. Smith School of Business, University of Maryland, College Park, Maryland,
U.S.A.
2
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.
INTRODUCTION
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
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
INDUSTRY
VENKATESH SHANKAR1 and BARRY L. BAYUS2 *
1
Robert H. Smith School of Business, University of Maryland, College Park, Maryland,
U.S.A.
2
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.
INTRODUCTION
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
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