Platform Performance Investment in the Presence of Network Externalities

Author List: Jr., Edward G.Anderson; Parker, Geoffrey; Tan, Burcu;
Information Systems Research, 2014, Volume 25, Issue 1, Page 152-172.
Managers of emerging platforms must decide what level of platform performance to invest in at each product development cycle in markets that exhibit two-sided network externalities. High performance is a selling point for consumers, but in many cases it requires developers to make large investments to participate. Abstracting from an example drawn from the video game industry, we build a strategic model to investigate the trade-off between investing in high platform performance versus reducing investment in order to facilitate third party content development. We carry out a full analysis of three distinct settings: monopoly, price-setting duopoly, and price-taking duopoly. We provide insights on the optimum investment in platform performance and demonstrate how conventional wisdom about product development may be misleading in the presence of strong cross-network externalities. In particular, we show that, contrary to the conventional wisdom about “winner-take-all” markets, heavily investing in the core performance of a platform does not always yield a competitive edge. We characterize the conditions under which offering a platform with lower performance but greater availability of content can be a winning strategy.
Keywords: two-sided markets;network externality;product development;video game industry
Algorithm:

List of Topics

#5 0.157 consumer consumers model optimal welfare price market pricing equilibrium surplus different higher results strategy quality cost lower competition firm paper
#98 0.144 platform platforms dynamics ecosystem greater generation open ecosystems evolution two-sided technologies investigate generations migration services implications interplay disruptive control markets
#271 0.102 technology investments investment information firm firms profitability value performance impact data higher evidence diversification industry payoff return findings decisions greater
#112 0.096 services service network effects optimal online pricing strategies model provider provide externalities providing base providers fee complementary demand offer derive
#90 0.088 development life cycle prototyping new stages routines stage design experiences traditional time sdlc suggested strategies rapid effort integrated needs techniques
#89 0.068 product products quality used characteristics examines role provide goods customization provides offer core sell key potential stronger insights design initial
#19 0.061 content providers sharing incentive delivery provider net incentives internet service neutrality broadband allow capacity congestion revenue cost efficient enhanced provides
#92 0.057 equity conventional punishment justice wisdom focus behavior fairness compliance suggest theory significant certainty misuse reward settings behavioral mandatory drawing widely