DVD Versus DIVX Standard War, The: Empirical Evidence of Network Effects and Preannouncement Effects

Interoperability, Competition Policy and Antitrust and Standards

Article Snapshot

Author(s)

David Dranove and Neil Gandal

Source

CEPR Discussion Paper #3634; Journal of Economics and Management Strategy, Vol. 12, pp. 363-386, 2002

Summary

This paper looks at how firms’ announcements about technology to media affect consumers and competition.

Policy Relevance

The Internet makes it easier for consumers to communicate, avoiding problems that could arise if firms try to delay the adoption of a good technology.

Main Points

  • Some worry that firms announce products that do not exist yet, “vaporware,” so that consumers will hesitate to commit to a rival’s product; some argue this violates  antitrust law.

  • “Network effects” mean that a network becomes more valuable to a consumer when there are more other users. One fax machine is not useful as no one can send to or receive from it, but as more are added it is more useful.
    • With DVD (Digital Video Disk) players, network effects come from the fact that the players are more valuable if more disks work with them.
    • Some argue that network effects mean that consumers need help from regulators so the best standard is adopted.

  • DVD technology began to be adopted despite concerns that it would cause piracy problems. Circuit city announced a competing standard, DIVX (Digital Video Express) with more anti-piracy protection.  Data shows that the pre-announcement of DIVX slowed the growth of DVD somewhat, especially discouraging sales for Christmas.  

  • When DIVX was officially abandoned, DVD sales did not change, suggesting that people already knew that DVD would prevail, perhaps because of the ease of Internet communication.

  • Also published under the title, "The DVD vs. DIVX Standard War: Empirical Evidence of Vaporware."

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