Network Effects and Comeptition: An Empirical Analysis of the Home Video Game Industry

An article published a little while back in Wiley InterScience takes a very interesting look into the role network effects and externalities play in the video game industry. How does network size (user base) aid or harm a major competitor in this industry? Moreover, what does it mean to succeed in such a closed market?

This paper proves even more interesting as it was written a few years ago, which in terms of technology is quite a long time. With the advantage of time we can now look back and see how accurately their model and predictions depict the state of the industry. Shankar and Bayus focus primarily on the 16-bit generation of consoles - namely the Nintendo SNES vs. Sega Genesis period - for which much data existed at the time of writing. The take a look at externalities in competition of two incompatible products. Shankar and Bayus used data on hardware sales, prices, advertising expenditures, and installed customer base for the two companies to predict Nintendo’s eventual control of the market, despite Sega’s almost two year lead in release time over Nintendo.

These same conclusions about the different factors that affect the gaming industry can be applied to today’s market and major contributors. If the amount that release time, initial user network size, price, etc. contribute to the success of one platform over another remain the same over time, can we predict what lies ahead for the now seventh generation of video games? Who among the major hardware contributors - Sony, Microsoft, and Nintendo - will guide the video gaming future?