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

Researchers debate the role of installed base, platform quality and consumer expectations in driving the success of platforms. We analyze a dynamic model in which a new entrant with superior quality competes with an incumbent platform, and examine the long-run market outcomes. We find that the driver of market dynamics depends critically on the strength of indirect network effects and the consumer discount factor of future applications. We empirically examine the competition between the Xbox and PlayStation 2 consoles. We find that Xbox has a small quality advantage over PlayStation 2, and that the strength of indirect network effects and the discount factor in this market are within the range in which the market dynamics are quality driven. Counterfactual experiments suggest that PlayStation 2 could drive Xbox out of the market if the strength of indirect network effects more than doubles or the consumer discount factor increases by fifty percent.