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01.08.2016 | Research Article

Intra-Standard Competition: The Joint Impact of an Installed-User Base and a Supporting-Firm Base in Markets with Network Effects

verfasst von: Qi Wang, Huazhong Zhao, Jinhong Xie

Erschienen in: Customer Needs and Solutions | Ausgabe 3-4/2016

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Abstract

The literature on network effects has demonstrated the value of an installed-user base (i.e., the number of adopters increases the value of the new product) and a supporting-firm base (i.e., the number of supporting firms increases the value of the underlying new technology) in the success of a new technology in markets with network effects. However, little is known about how the installed-user base and supporting-firm base jointly affect interactions between an innovator and other firms in the supporting-firm base (i.e., its rivals) over a product life cycle. Specifically, this paper argues that in the presence of both an installed-user-base effect and a supporting-firm-base effect, the nature of interactions between the innovator and its rivals will vary across the life cycle of a new technology and thus exhibit a stage-dependent pattern. Based on data from two markets with network effects—the floppy disk drive market and the personal digital assistant market—our empirical analysis reveals some interesting findings. First, the installed-user-base effect and the supporting-firm-base effect influence firms’ competitive behavior in opposite directions: the former encourages price competition while the latter encourages cooperation. Second, the competitive structure in these markets has not been fixed but is rather stage-dependent; that is, firms behaved cooperatively in the early stage, competitively in the middle stage, and then less competitively in the late stage of the new technology life cycle. These findings have important implications for innovators in determining the allocation of limited resources designed to spur the success of a new techn`ology.

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Price competition can be empirically analyzed by examining the price competition between the innovator and each of the supporting firms in a market. However, as the number of firms increases, the number of parameters that capture the competitive interactions between the innovator and each of the supporting firms increases exponentially. For example, with n firms (including both innovator and rivals) in a market, n × n parameters must be estimated. To keep the parameters parsimonious, we examine instead how the installed-user base and the supporting-firm base impact price competition between an innovator and one representative supporting firm.

We would like to thank James Porter [36] for his generous offer of the Disk Trend Report series.

To validate our results on the competitive structures, following Davison and Hinkley [13], we use a bootstrap technique to provide an alternative estimation of the standard error for each parameter. This method is widely used as an alternative to statistical inference without requiring any particular assumption of distribution such as asymptotic normal distribution in the three-stage least-square estimation method. Our results show that the corresponding t statistics based on bootstrapped standard errors are consistent with the parameter estimates by three-stage least-square estimation, which suggest that the results reported in Table 2 are reasonably robust. The estimation results are available upon request from the authors.

While this explanation recognizes the incentives that firms have to perform in such a time-varying pattern in markets with network effects, it may also be possible that such a stage-dependent competitive pattern occurs because it is less costly for them to cooperate in the early and late stages when a small number of firms are in the market and less costly than competing in the middle stage when more firms have entered.

While Apple and Google unveiled their iOS and Android mobile devices with similar or enhanced functionalities in 2007 and 2008, respectively, which later become the new dominating standard, they are generally regarded as technological standards of the tablet market.

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Titel: Intra-Standard Competition: The Joint Impact of an Installed-User Base and a Supporting-Firm Base in Markets with Network Effects
verfasst von: Qi Wang
Huazhong Zhao
Jinhong Xie
Publikationsdatum: 01.08.2016
Verlag: Springer US
Erschienen in: Customer Needs and Solutions / Ausgabe 3-4/2016
Print ISSN: 2196-291X
Elektronische ISSN: 2196-2928
DOI: https://doi.org/10.1007/s40547-016-0066-3