Network Effects, Quality and the Success of New High-Tech Products

Researchers disagree about the critical drivers of success in high-tech markets and whether high-tech markets are efficient. Many authors suspect that network effects play a big role leading to perverse markets in which the dominant brands do not have the best quality. At the same time, few researchers assert that high-tech markets are efficient with best quality brands dominating. We develop a model to reconcile these conflicting positions. Our model shows that whether the market is perverse or efficient depends critically on consumer information about quality and consumers reliance on the network of users. As such, efficiency cannot be asserted a priori. Empirical analysis of 19 categories shows that 1) both quality and network effects are strong and 2) markets are generally efficient, though 3) while network effects are stronger than those of quality, they lie in a range in which they enhance the effect of quality.