Paper on network effects in the video game market

In the course we have been recently discusing network effects. Indeed, network effects and positive feedback loops have received a great deal of attention, academically and otherwise. In a market with network effects, competition among multiple incompatible systems is intense, because a small, initial advantage confers a larger advantage in the future. Many theoretical papers suggest various competitive strategies in a market with strong indirect network effects, but little work has been done on what strategies are most effective in each phase of the product cycle. The paper I linked to above
analyzes two sides of the U.S. video game market, hardware adoption by consumers and software provision
by game makers, and estimates the elasticities of adoption with respect to console price and software variety.
It found that the relative size of the elasticities of hardware demand differs over the product cycle: When
a console is introduced, hardware demand is quite elastic with respect to price, but much less elastic with
respect to software variety. As the console becomes mature, the price elasticity declines substantially, but
the elasticity with respect to software variety increases substantially. The estimation results suggest that,
while a sufficiently large set of software may be necessary to launch a system, a platform provider should use
penetration pricing to encourage adoption at the outset (i.e., a lower price-cost margin). Once the platform
provider succeeds in establishing an installed base, it can expand the installed base, and thus the profitability
of the platform, by encouraging software entry. A wider variety of software is crucial for attracting later
adopters to the platform. The areas of analysis covered by the paper helped to shed light on network effects in the video game market, but neglected to fully discuss the varying incentives of platform providers . The different supply strategies used by platform providers seem to have an effect on console adoption by users. It would seem that some systems gain popularity by having an initial scarcity; this scarcity causes the system to have the illusion of a network effect, which leads to the actual network effect of console adoption.