An Empirical Analysis of Consumer Purchase Behavior of Base Products and Add-ons Given Compatibility Constraint

In the digital camera market, Sony developed the Memory Stick card, which is only compatible with Sony’s cameras. However, Kodak, Canon, Nikon, and HP all adopted the SD (Secure Digital) memory card. Despite the common practice of multiple standards, there is lack of knowledge on how technological compatibility affects consumer purchase decisions on base products and add-ons at the brand and/or standard level. We recognize the existence of multiple standards and develop a dynamic model in which a consumer makes periodic purchase decisions on whether to adopt/replace a base product and/or an add-on product. We take into account the dynamic and interactive inventory effect by allowing consumers to recognize the long-term financial implications when forward-planning in switching to a base product that is incompatible with the inventory of memory cards they have accumulated. Applying the model to consumer purchase history of digital cameras and memory cards from 2000 to 2004, we demonstrate compatibility makes consumer purchase decisions of base and addon products inter-temporally interdependent. Inventory of add-ons significantly affects purchases of base products. Our model explains the sales trends of the major brands of cameras and quantifies how much promotion to offer consumers in order to switch standards.