Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
    • Working Paper Summaries
  • Browse All
    Dynamics of Platform Competition: Exploring the Role of Installed Base, Platform Quality and Consumer Expectations
    04 Dec 2007Working Paper Summaries

    Dynamics of Platform Competition: Exploring the Role of Installed Base, Platform Quality and Consumer Expectations

    by Feng Zhu and Marco Iansiti
    What factors drive platform success, long-run market structure, and market efficiency? Conventional wisdom suggests that for a new platform to be successful, either it must make its technology compatible with the incumbent, or its technical advantage must offer so much value to consumers that it exceeds the combination of functionality, installed base, and complementary goods value offered by the incumbent. Zhu and Iansiti develop a dynamic model to examine the evolution of platform-based markets. They find that a huge quality advantage may not be necessary for an entrant to be successful. Using data from the video game industry, they find support for their theoretical predications. Key concepts include:
    • A huge quality advantage may not be necessary for success. When market dynamics are driven by quality, a platform with a small quality advantage can also be successful.
    • Xbox has a small quality advantage over Playstation 2 and the market dynamics are quality driven. These results help explain the successful entry of the Xbox console into this market and provide support for Zhu and Iansiti's theoretical model.
    • Installed-base advantages do not necessarily provide a safety shield for the incumbent. To defend its leadership position, the incumbent needs to constantly enhance its quality.
    LinkedIn
    Email

    Author Abstract

    This paper seeks to answer three questions. First, which drives the success of a platform, installed base, platform quality or consumer expectations? Second, when does a monopoly emerge in a platform-based market? Finally, when is a platform-based market socially efficient? We analyze a dynamic model where an entrant with superior quality competes with an incumbent platform, and examine long-run market outcomes. We find that the answers to these questions depend critically on two parameters: the strength of indirect network effects and consumers' discount factor of future applications. In addition, contrary to the popular belief that indirect network effects protect incumbents and are the source of market inefficiency, we find that under certain conditions, indirect network effects could enhance entrants' quality advantage and market outcomes hence could be more efficient with stronger indirect network effects. We empirically examine the competition between the Xbox and PlayStation 2 consoles. We find that Xbox has a small quality advantage over PlayStation 2. In addition, the strength of indirect network effects and consumers' discount factor in this market are within the range in which platform success is driven by quality advantage and the market is potentially efficient. Counterfactual experiments suggest that PlayStation 2 could have driven Xbox out of the market had the strength of indirect network effects more than doubled or had consumers' discount factor increased by fifty percent.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: November 2007
    • HBS Working Paper Number: 08-031
    • Faculty Unit(s): Technology and Operations Management
      Trending
        • 13 Dec 2021
        • Research & Ideas

        The Unlikely Upside of Mergers: More Diverse Management Teams

        • 14 Mar 2023
        • In Practice

        What Does the Failure of Silicon Valley Bank Say About the State of Finance?

        • 16 Mar 2023
        • Research & Ideas

        Why Business Travel Still Matters in a Zoom World

        • 14 Dec 2021
        • Op-Ed

        To Change Your Company's Culture, Don't Start by Trying to Change the Culture

        • 25 Feb 2019
        • Research & Ideas

        How Gender Stereotypes Kill a Woman’s Self-Confidence

    Marco Iansiti
    Marco Iansiti
    David Sarnoff Professor of Business Administration
    Contact
    Send an email
    → More Articles
    Find Related Articles
    • Strategy
    • Entertainment and Recreation

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Accessibility
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College