Cooperative Strategies to Leverage Network Externalities: Evaluating Network Partnerships in the B2b Software Market

In the presence of network externalities, product features compatible with standards and larger installed bases of the relevant technologies lead to expanded market shares and increased customer valuation. Our research finds that firms which collaborate with other organizations do so to enhance product compatibility and expand their installed bases. We study the effects of such cooperative strategies in the market for business-to-business software, using the data of 34 publicly-traded firms which announced 1088 network partnerships during the 1998 to 2001 time period, when the largest number of strategic alliances were formed. We estimate cross-sectional and fixed effects panel data models, with appropriate controls in place to deal with a number of firm and environmental issues. The dependent variables that are employed involve firm profitability, cost efficiency for revenue production, and stock price at the firms’ initial public offerings (IPOs). Our results show that companies which formed more alliances to enhance their product compatibility levels were able to obtain higher valuations from the market when they issued stock. Moreover, compatibility partnerships seem to increase revenue efficiency, while installed-base partnerships enhance profitability.