Market leadership through technology - backward compatibility in the U.S. handheld video game industry

Jörg Claussen, Tobias Kretschmer and Thomas Spengler

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The introduction of a new product generation forces incumbents in network industries to rebuild their installed base to maintain an advantage over potential entrants. We study if backward compatibility moderates this process of rebuilding an installed base. Using a structural model of the U.S. market for handheld game consoles, we show that backward compatibility lets incumbents transfer network effects from the old generation to the new to some extent but that it also reduces supply of new software. We examine the tradeoff between technological progress and backward compatibility and find that backward compatibility matters less if there is a large technological leap between two generations. We subsequently use our results to assess the role of backward compatibility as a strategy to sustain market leadership.

Keywords: backward compatibility; market leadership; network effects; video games; two-sided markets (search for similar items in EconPapers)
JEL-codes: L15 L82 O33 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2012-02-10
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http://eprints.lse.ac.uk/121760/ Open access version. (application/pdf)

Related works:
Working Paper: Market Leadership Through Technology - Backward Compatibility in the U.S. Handheld Video Game Industry (2012)
Working Paper: Market leadership through technology – Backward compatibility in the U.S. Handheld Video Game Industry (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:121760

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