Di¤usion of a New Product under Network E¤ects: The U.S. DVD Market

We formulate a model that captures the inter-dependence between hardware demand and software supply –indirect network e¤ect in the DVD industry. The identi…cation of the network e¤ect comes from the di¤erence in software availability across two di¤erent formats: VHS and DVD. We …nd that a 1% increase in the number of DVD titles raises the demand for DVD players by 0.68%. Simultaneously, a 1% increase in video player ownership leads to a 0.16% increase in the variety of video titles. Our simulations show that hardware manufacturers might be able to internalize the network externality to increase total industry revenues. JEL classi…cation: L1, C10 Keywords: Network e¤ects; DVD; Discrete Choice Models Sabanci University and Korea Information Strategy Development Institute, respectively. E-mail: [email protected], [email protected]. We would like to thank to Marc Rysman for setting us in the right direction We are also thankful to Victor Aguirregabiria, Kevin Lang, Martino De Stefano and Masashi Saito for their useful suggestions. This paper has bene…ted from the comments of the participants at the International Conference on Industrial Organization in Chicago, and the Graduate Student Workshop at Boston University. We also thank to Je¤ Jordan at NPD Tech, and VSDA for their help in providing us with the data. Department of Economics Graduate Student Academic Research Grant is gratefully acknowledged.