System Markets: Indirect Network Effects in Action, or Inaction? Defended on Friday, 5 November 2010
In this dissertation, I empirically examine system markets up close. More specifically I examine indirect network effects, both demand-side and supply-side indirect network effects. Indirect network effects are the source of positive feedback in system markets, or so network effect theory tells us. Systems are composed of complementary and interdependent products, such as hardware and software. For instance, a video game system is composed of the video game console, on the one hand, and video games, on the other hand.
Surprisingly, I find that the positive feedback cycle of indirect network effects is less pervasive, or at least more complex, than “current wisdom” would have us believe. Supply-side and/or demand-side indirect network effects, as traditionally operationalized, are often not present. When present, they display strong heterogeneity. There is often no positive feedback cycle present in the initial stage of the system’s life cycle. Software quantity is of little importance, while software products of exceptional high quality (i.e., superstars) play an important role. Our empirical studies identify numerous factors marketing manager can manipulate to influence the positive feedback cycle. Subsequently marketing managers can incorporate our findings in their marketing strategy, and outmaneuver competitors (i.e., competing systems, fellow complementors).
system markets, indirect network effects, chicken-and-egg, superstars, new product introductions, new product growth, takeoff, firm entry, pre-entry experience, video game industry