Platform Performance Investment in the Presence of Network Externalities

Media and Content, Internet and Networks, the Internet, and Cloud Computing

Article Snapshot

Author(s)

Edward G. Anderson, Jr., Geoffrey Parker and Burcu Tan

Source

Information Systems Research, Vol. 25, No. 1, pp. 152-172, 2014

Summary

Managers of platforms must decide whether to invest more in core platform performance or less, to reduce costs to third-party developers. This study creates a model for such investments based on the video game industry.

Policy Relevance

Platforms can often thrive by offering more user content instead of improving performance.

Main Points

  • When Nintendo’s Wii was introduced, the market leaders were the PlayStation 3 (PS3) and the Xbox 360.
     
    • The Wii’s graphics and processing performance lagged behind the others.
       
    • Game developers note that the costs of making Wii games was low.
       
    • Many games were made for the Wii.
       
    • The Wii quickly gained the largest installed player base and became the market leader.
       
  • Game platforms serve a two-sided market with strong network externalities; that is, game consoles serve both gamers and game developers, who attract one another.
     
  • In a one-sided market, fierce competition between product makers will spur improved performance, but this does not make sense in a two-sided market.
     
  • In a monopolistic market, if the platform is attractive to developers, the platform sponsor might sometimes benefit from improving performance.
     
  • Video game console makers are price takers, that is, they often sell consoles near cost and would not benefit from raising console prices.
     
  • In a duopoly with price takers, platforms benefit from investing less in performance to ensure developers offer plentiful content, even when end-users show interest in better performance.
     
  • Military aircraft are also platforms serving a two-sided market; they serve the air force and developers of add-on products like engine upgrades or attachment points for cruise missiles.
     
    • An inferior aircraft like the F-16 can attract developers and thrive after the basic airframe has become obsolete.
       
    • New “stealth” airframes raise costs for developers by requiring them to follow guidelines that do not improve the performance of the developer’s product.
       

 

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