Both theoretical and empirical evidence suggest that, in markets with standards competition, strong network effects can make the strong grow stronger and even "tip" the market towards a single, winner-take-all standard. We theorize that the presence of conversion technologies will reduce the tendency towards market dominance in markets for digital goods. We develop three essays to explore this phenomenon within both an analytic and empirical framework.
In essay 1 the results from a duopoly model confirm that the existence of a converter can mediate the network effects of a pre-existing installed base. A "winners-take-some" outcome that sustains competition after the entrant enters the market is more likely to arise with lower conversion costs. Surprisingly, higher quality conversion technology does not necessarily enhance the likelihood of the "winners-take-some" outcome.
In essay 2 we endogenize the decision to provide a converter and incorporate explicit negotiations between firms concerning the extent of conversion. We find that the Subgame Perfect Nash Equilibrium involves firms' agreeing on providing converters at a sufficiently low price to all consumers. At this equilibrium, not only the entrant, but also the incumbent are better off since the provision of converters alleviates price competition and leads to both higher product revenues and higher proceeds from the sale of converters. Moreover, under some circumstances the provision of converters is welfare enhancing.
In essay 3 we empirically test our hypotheses in the context of the flash memory market where both network effects and high quality digital converters are present. Our results show that the availability of digital converters reduces the price premium of the leading flash card formats more than that of the minority formats. In addition, market concentration decreases as converters become more widely available. Our findings imply that producers of non-dominant standards are better off with the provision of conversion technology, as this technology tends to neutralize the impact of network effects.
These findings have important implications for research and practice in IT standards competition and technology adoption as the introduction of conversion technologies provides an alternative mechanism to reduce the social costs of standardization without compromising the benefits of network effects.
| Identifer | oai:union.ndltd.org:PITT/oai:PITTETD:etd-07072008-234703 |
| Date | 29 September 2008 |
| Creators | Liu, Zhechao |
| Contributors | Esther Gal-Or, Sandra A. Slaughter, Chris F. Kemerer, Michael D. Smith, Brian S. Butler |
| Publisher | University of Pittsburgh |
| Source Sets | University of Pittsburgh |
| Language | English |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | http://etd.library.pitt.edu/ETD/available/etd-07072008-234703/ |
| Rights | unrestricted, I hereby certify that, if appropriate, I have obtained and attached hereto a written permission statement from the owner(s) of each third party copyrighted matter to be included in my thesis, dissertation, or project report, allowing distribution as specified below. I certify that the version I submitted is the same as that approved by my advisory committee. I hereby grant to University of Pittsburgh or its agents the non-exclusive license to archive and make accessible, under the conditions specified below, my thesis, dissertation, or project report in whole or in part in all forms of media, now or hereafter known. I retain all other ownership rights to the copyright of the thesis, dissertation or project report. I also retain the right to use in future works (such as articles or books) all or part of this thesis, dissertation, or project report. |
Page generated in 0.002 seconds