Hardware Quality vs. Network Size in the Home Video Game Industry

This paper analyzes competition between multiple proprietary and incompatible hardware systems when indirect network effects are present and software is provided competitively by third party developers. A discrete choice demand structure is employed within a game theoretic setting to allow for a continuum of market share possibilities. Empirical evidence supports the claim that excess inertia is not a pervasive problem. Two data sets covering the life of the home video game industry (yearly from 1976 to 2003 and monthly January 1995 to October 2007) yield three main results: (1) market share is 11.4 times more sensitive to hardware quality than network size, (2) the number of available games is 3.69 times more sensitive to hardware quality than network size, and (3) hardware quality has a larger impact than network size on the probability of hardware success