Blockbuster Software Titles and Indirect Network Effects in the Home Video Game Industry

This paper investigates the indirect network effects in hardware/software system markets. It is argued in the previous literature that the sales of the hardware is highly affected by the availability of compatible software products. A majority of the previous literature has shown that software quantity is a major factor influencing hardware demand. By doing so, the effect on the hardware demand is assumed to be equal across software titles. (Nair, Chintagunta, and Dubé 2004) In this paper, I use a static model in which I let individual software titles vary in how much they affect hardware demand. Different from the literature that also does this(Lee 2008), I allow software titles to be substitutes(Derdenger 2008). I show that for the 6th generation video games and consoles that I use in my empirical analysis, one blockbuster game can impact sales of other games on the same console. Then I test for my data that high quality software titles have a bigger impact on hardware demand then do low quality software titles. Further, I argue that a hardware platform needs a blockbuster title to attract consumers.