Winning while losing: Competition dynamics in the presence of indirect network effects.(Report) Markovich, Sarit; Moenius, Johannes

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Markovich, Sarit ; Moenius, Johannes
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International Journal of Industrial Organization
Business, international; Competitions; Analysis
To link to full-text access for this article, visit this link: Byline: Sarit Markovich (a), Johannes Moenius (b) Keywords: Indirect network effects; Dynamics; Competition Abstract: What determines competition dynamics in markets with indirect network effects? We analyze this question in a dynamic hardware-software framework, where software firms compete in quality upgrades. We identify market structure as a major determinant of competition dynamics. Indirect network effects tie together the performance of firms on the same platform: a successful competitor raises the value of all firms on the same platform, where an unsuccessful firm may enjoy a windfall increase in its market value. In contrast to the tipping result in the literature, we find tendencies toward increasing competition across platforms for a wide range of market structures. Author Affiliation: (a) Kellogg School of Management, Northwestern University, Evanston, IL 60208-2013, United States (b) School of Business, University of Redlands, Redlands, CA 92373-0999, United States Article History: Received 15 February 2006; Revised 23 June 2008; Accepted 9 October 2008 Article Note: (footnote) [star] We would like to thank David Besanko, Ulrich Doraszelski, Shane Greenstein, and Karl Schmedders, as well as seminar participants at Harvard University, Northwestern University and the ZEW conference in Mannheim for their comments. Our editor, Roman Inderst and two anonymous referees provided very helpful comments. Angela Malakhov, Ami Navon and Veronica Tong provided excellent research assistance. All remaining errors are ours.
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