Platform Performance Investment in the Presence of Network Externalities

Edward G. Anderson (), Geoffrey G. Parker () and Burcu Tan ()
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Edward G. Anderson: University of Texas, Austin, Texas 78712
Geoffrey G. Parker: A. B. Freeman School of Business, Tulane University, New Orleans, Louisiana 70118
Burcu Tan: A. B. Freeman School of Business, Tulane University, New Orleans, Louisiana 70118

Information Systems Research, 2014, vol. 25, issue 1, 152-172

Abstract: 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 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (65)

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