Shankar and Bayus (2002)
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Source Details
| Shankar and Bayus (2002) | |
| Title: | Network Effects and Competition:Empirical Analysis of the Home Video Game Industry |
| Author(s): | Shankar, V., Bayus, B. L. |
| Year: | 2002 |
| Citation: | Shankar, V., & Bayus, B. L. (2003). Network effects and competition: An empirical analysis of the home video game industry. Strategic Management Journal, 24(4), 375-384. |
| Link(s): | Definitive , Open Access |
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| About the Data | |
| Data Description: | The data available for estimation purposes include monthly time-series information between January 1993 and August 1995 for Nintendo and Sega 16-bit hardware sales (units), hardware price (dollars), advertising expenditures (millions of dollars), and installed customer base size (units) for the 16-bit systems (and Nintendo’s 8-bit system). In addition data on sales of the top 10 software titles (i.e., “killer” games) for each system (millions of dollars) is used as our measure of software quality. |
| Data Type: | Secondary data |
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| Cross Country Study?: | No |
| Comparative Study?: | No |
| Literature review?: | No |
| Government or policy study?: | No |
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Abstract
"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 16-bit 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 non-cooperative 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)."
Main Results of the Study
- Consistent with most theoretical models’ assumption that the direct effect of a customer network on demand is symmetric across competitors (e.g., Katz and Shapiro 1985; 1985; 1992; Farrell and Saloner 1985; 1986), This paper finds that:* The network size coefficients of Nintendo and Sega are significant but not statistically different. * In agreement with the hedonic price models for computer spreadsheet software (e.g., Gandal 1994; 1995; Brynjolfson and Kemerer 1996), Price effectiveness of Nintendo and Sega is a function of network size. * Each firm’s advertising effectiveness is influenced by its relative network size. * empirical results also show that Nintendo and Sega have asymmetric network effects since the interactive network strength values through price and advertising are statistically different for the two firms. * These asymmetric network strength values may help explain why Nintendo was able to pass Sega in monthly sales of 16-bit home video game systems despite Sega’s larger installed base.
Policy Implications as Stated By Author
Coverage of Study
Datasets
| Sample size: | 64 |
| Level of aggregation: | Unit Sales |
| Period of material under study: | January 1993- August 1995 |
