B&T10620_ERIM_Omslag_Binken_5okt10 SYSTEM MARKETS 213 JEROEN L.G. BINKEN INDIRECT NETWORK EFFECTS IN ACTION, OR INACTION? In this dissertation, I empirically examine system markets up close. More specifically I examine indirect network effects, both demand-side and supply-side indirect network effects. Indirect network effects are the source of positive feedback in system markets, or System Markets so network effect theory tells us. Systems are composed of complementary and inter - JEROEN L.G. BINKEN - System Markets dependent products, such as hardware and software. For instance, a video game system is Indirect Network Effects in Action, or Inaction? composed of the video game console, on the one hand, and video games, on the other hand. Surprisingly, I find that the positive feedback cycle of indirect network effects is less pervasive, or at least more complex, than “current wisdom” would have us believe. Supply-side and/or demand-side indirect network effects, as traditionally operationalized, are often not present. When present, they display strong heterogeneity. There is often no positive feedback cycle present in the initial stage of the system’s life cycle. Software quantity is of little importance, while software products of exceptional high quality (i.e., superstars) play an important role. Our empirical studies identify numerous factors marketing manager can manipulate to influence the positive feedback cycle. Subsequently ERIM marketing managers can incorporate our findings in their marketing strategy, and out - maneuver competitors (i.e., competing systems, fellow complementors). Design & layout: B&T Ontwerp en advies (www.b-en-t.nl) Print: Haveka (www.haveka.nl) Design & layout: B&T Ontwerp en advies (www.b-en-t.nl) ERIM The Erasmus Research Institute of Management (ERIM) is the Research School (Onder - zoek school) in the field of management of the Erasmus University Rotterdam. The founding participants of ERIM are Rotterdam School of Management (RSM), and the Erasmus School of Econo mics (ESE). ERIM was founded in1999 and is officially accre dited by the Royal Netherlands Academy of Arts and Sciences (KNAW). The research under taken by ERIM is focused on the management of the firm in its environment, its intra- and interfirm relations, and its busi ness processes in their interdependent connections. The objective of ERIM is to carry out first rate research in management, and to offer an ad vanced doctoral programme inResearch in Management. Within ERIM, over three hundred senior researchers and PhD candidates are active in the different research pro- grammes. From a variety of acade mic backgrounds and expertises, the ERIM community is united in striving for excellence and working at the forefront of creating new business knowledge. Erasmus Research Institute of ManagementErasmus Research - ERIM PhD Series Research in Management Erasmus Research Institute of Management - ERIM Tel. +31 10 408 11 82 ERIM Rotterdam School of Management (RSM) Fax +31 10 408 96 40 Erasmus School of Economics (ESE) E-mail [email protected] P.O. Box 1738, 3000 DR Rotterdam Internet www.erim.eur.nl The Netherlands System markets: Indirect network effects in action, or inaction? System markets: Indirect network effects in action, or inaction? Systeem markten: indirecte netwerk effecten in actie of inactie? PROEFSCHRIFT ter verkrijging van de graad van doctor aan de Erasmus Universiteit Rotterdam op gezag van de Rector Magnificus Prof.dr. H.G. Schmidt en volgens besluit van het College voor Promoties. De openbare verdediging zal plaatsvinden op vrijdag 5 november 2010 om 09.30 uur door Jeroen Leonardus Gerardus Binken geboren te Gouda Promotiecommissie Promotor: Prof.dr. S. Stremersch Copromotor: Prof.dr. H.R. Commandeur Overige leden: Prof.dr.ir. B.G.C. Dellaert Prof.dr. Ph.H.B.F. Franses Dr. A. Lemmens Erasmus Research Institute of Management – ERIM Rotterdam School of Management (RSM) Erasmus School of Economics (ESE) Erasmus University Rotterdam Internet: http://www.erim.eur.nl ERIM Electronic Series Portal: http://hdl.handle.net/1765/1 ERIM PhD Series in Research in Management, 213 ERIM reference number: EPS-2010-213-MKT ISBN 978-90-5892-260-1 © 2010, Jeroen L.G. Binken ([email protected]) Design: B&T Ontwerp en advies www.b-en-t.nl Print: Haveka www.haveka.nl All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the author. We shall not cease from exploration And the end of all our exploring Will be to arrive where we started And know the place for the first time. T. S. Eliot, 1942. Preface The completion of this dissertation is the culmination of my endeavors at the Erasmus University. During my education, while following the courses of Harry Commandeur, network effects, especially indirect network effects, caught my attention. $IWHU UHDGLQJ µ,QIRUPDWLRQ 5XOHV¶ E\ &DUO 6KDSLUR DQG +DO 9DULDQ,ZDVKRRNHGRQ QHWZRUNHIIHFWV7KLVDGGLFWLRQDFFXPXODWHGLQWRILUVWLQP\GRFWRUDOWKHVLV µ$UH'LJLWDO Market Failing: An In-depth Look at Supply-side and Demand-sidH 3RVLWLYH )HHGEDFN¶ DQG QRZ LQ WKLV GLVVHUWDWLRQ µ6\VWHP 0DUNHWV ,QGLUHFW 1HWZRUN (IIHFWs in Action, or ,QDFWLRQ"¶ First and foremost, I wish to thank my promoter Stefan Stremersch for his enthusiasm, guidance, support and high standards. Without him, this dissertation would not have existed, and our papers would not have been published. I also would like to give special thanks to the members of the committee, for their valuable contribution to this dissertation. In addition, I would like to thank, co-authors, colleagues from marketing and econometrics, editors and reviewers, roommates, IHOORZ3K'¶Vand everybody from ERIM and the marketing department, for their advice and support during my years as a PhD. My thanks also go out to NPD, for providing part of the sales data. Last, but certainly not least, I would like to thank my family and close friends, for their unconditional love, guidance, friendship and support. Jeroen, 2009. iii Introduction ........................................................................................... 1 1.1 Motivation ......................................................................................... 1 1.2 Outline .............................................................................................. 3 New Product Growth in System Markets ............................................ 5 2.1 Introduction ....................................................................................... 5 2.2 Theoretical Background ................................................................. 14 2.2.1 Indirect Network Effects .......................................................................... 15 2.2.2 Temporal Pattern in Indirect Network Effects ...................................... 15 2.2.3 Other Effects ............................................................................................. 17 2.3 Data ................................................................................................ 18 2.3.1 Data Collection ......................................................................................... 18 2.3.2 Characteristics of the Sample ................................................................ 19 2.4 Empirical Analysis .......................................................................... 23 2.4.1 Takeoff Analysis ....................................................................................... 24 2.4.2 Time Series Analysis ............................................................................... 29 2.4.3 Further Analyses ...................................................................................... 37 2.4.4 Historical Industry Analysis ..................................................................... 38 2.5 Discussion ...................................................................................... 42 2.5.1 Summary of Findings ............................................................................... 43 2.5.2 Implications ............................................................................................... 43 2.5.3 Limitations ................................................................................................. 45 Superstars in System Markets ........................................................... 51 3.1 Introduction ..................................................................................... 51 3.2 Superstar Introductions and Other Determinants .......................... 53 3.2.1 Superstars ................................................................................................. 53 3.2.2 Software Life Cycle .................................................................................. 57 3.2.3 Software Type ........................................................................................... 59 3.2.4 Other Variables ......................................................................................... 60 3.3 Data ................................................................................................ 62 3.3.1 Video Game Industry ............................................................................... 62 3.3.2 Sample ....................................................................................................... 65 3.3.3 Data Collection ........................................................................................