Entry into platform‐based markets

TLDR

The study investigates how platform quality, indirect network effects, and consumer expectations influence the success of entrants in platform‑based markets. The authors build a theoretical model linking entrant success to indirect network effects and consumer discount factors, and illustrate it with Xbox’s entry into the video game industry. The analysis shows Xbox had a modest quality edge over PlayStation 2, but the indirect network effects and consumer discount factor were strong enough to render PlayStation 2’s position unsustainable. © 2011 John Wiley & Sons, Ltd.

Abstract

Abstract This paper examines the relative importance of platform quality, indirect network effects, and consumer expectations on the success of entrants in platform‐based markets. We develop a theoretical model and find that an entrant's success depends on the strength of indirect network effects and on the consumers' discount factor for future applications. We then illustrate the model's applicability by examining Xbox's entry into the video game industry. We find that Xbox had a small quality advantage over the incumbent, PlayStation 2, and the strength of indirect network effects and the consumers' discount factor, while statistically significant, fall in the region where PlayStation 2's position is unsustainable. Copyright © 2011 John Wiley & Sons, Ltd.