Backward Compatibility to Sustain Market Dominance – Evidence from the US Handheld Video Game Industry

Jörg Claussen, Tobias Kretschmer and Thomas Spengler

Discussion Papers in Business Administration from University of Munich, Munich School of Management

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 can help moderate this process of rebuilding an installed base. Using a structural model of the US 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 also find that backward compatibility matters most shortly after the introduction of a new generation. Finally, 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 a dominant market position.

Keywords: backward; compatibility; market; dominance; network; effects; two-sided; markets (search for similar items in EconPapers)
JEL-codes: L15 L82 O33 (search for similar items in EconPapers)
Date: 2010-05
New Economics Papers: this item is included in nep-com and nep-net
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Citations: View citations in EconPapers (4)

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