Market Leadership Through Technology: Backward Compatibility in the U.S. Handheld Video Game Industry

Jörg Claussen, Tobias Kretschmer, Thomas Spengler

    Research output: Working paperResearch

    Abstract

    The introduction of a new product generation forces incumbents in network industries to rebuild their installed base to maintain an advantage over potential entrants. We study if backward compatibility moderates this process of rebuilding an installed base. Using a structural model of the U.S. market for handheld game consoles, we show that backward compatibility lets incumbents transfer network effects from the old generation to the new to some extent but that it also reduces supply of new software. We examine the tradeoff between technological progress and backward compatibility and find that backward compatibility matters less if there is a large technological leap between two generations. We subsequently use our results to assess the role of backward compatibility as a strategy to sustain market leadership.
    Original languageEnglish
    Place of PublicationLondon
    PublisherThe London School of Economics and Political Science, LSE
    Number of pages35
    Publication statusPublished - 2012
    SeriesCEP Discussion Paper
    Number1124

    Keywords

    • Backward Compatibility
    • Market Leadership
    • Network Effect
    • Video Games
    • Two-sided Markets

    Cite this

    Claussen, J., Kretschmer, T., & Spengler, T. (2012). Market Leadership Through Technology: Backward Compatibility in the U.S. Handheld Video Game Industry . The London School of Economics and Political Science, LSE. CEP Discussion Paper, No. 1124 http://cep.lse.ac.uk/_new/publications/abstract.asp?index=3999