This article proposes a new conceptual framework in which the impact of network effects (NE) on a pioneer's survival advantage compared with its early followers can be positive or negative depending on two important but previously ignored market characteristics: (1) cross-generation product compatibility and (2) within-generation product compatibility. The authors empirically test the theoretical predictions using data from 45 NE markets. They show that these two types of compatibility affect the pioneer's survival advantage in opposite directions and that such directions are reversed when NE changes from extremely strong to extremely weak. Specifically, in markets with strong NE, cross-generation incompatibility harms but within-generation incompatibility favors the pioneer's survival advantage. Consequently, pioneers are likely to enjoy a survival advantage when their product is cross-generation compatible but within-generation incompatible. However, in markets with weak NE, pioneer survival advantage is likely to occur under opposite conditions (i.e., cross-generation incompatible but within-generation compatible). The policy analysis further suggests that the best survival condition for pioneers often turns out to be the worst for followers in these markets.
BasuAmiya, MazumdarTridib, and RajS.P. (2003), “Indirect Network Externality Effects on Product Attributes,”Marketing Science, 22 (2), 209–221.
2.
BesenStanley M., and FarrellJoseph (1994), “Choosing How to Compete: Strategies and Tactics in Standardization,”Journal of Economics Perspectives, 8 (2), 117–31.
3.
CarpenterGregory S., and NakamotoKent (1989), “Consumer Preference Formation and Pioneering Advantage,”Journal of Marketing Research, 26 (August), 285–98.
4.
ChakravartiAmitav, and XieJinhong (2006), “Standards Competition and Effectiveness of Advertising Formats in New Product Introduction,”Journal of Marketing Research, 43 (May), 224–36.
5.
ChandyRajesh, and TellisGerard J. (2000), “The Incumbent's Curse? Incumbency, Size, and Radical Product Innovation,”Journal of Marketing, 64 (July), 1–17.
6.
ChenYuxin, and XieJinhong (2007), “Cross-Market Network Effect with Asymmetric Customer Loyalty: Implications for Competitive Advantage,”Marketing Science, 26 (1), 52–66.
7.
ChoiJay Pil (1994), “Network Externality, Compatibility Choice, and Planned Obsolescence,”Journal of Industrial Economics, 42 (2), 167–82.
8.
ClaretLaurent, GirardPascal, HoffPaulo, Van CutsemEric, ZuideveldKlaas, JorgaKarin (2009), “Model-Based Prediction of Phase III Overall Survival in Colorectal Cancer on the Basis of Phase II Tumor Dynamics,”Journal of Clinical Oncology, 27 (25), 4103–4108.
9.
CoxDavid Roxbee, and OakesDavid (1984), Analysis of Survival Data.New York: Chapman and Hall.
10.
DhebarAnirudh (1995), “Complementary, Compatibility, and Product Change: Breaking with the Past,”Journal of Product Innovation Management, 12 (2), 136–52.
11.
FarrellJoseph, and KlempererPaul (2007), “Coordination and Lock-In: Competition with Switching Costs and Network Effects,” in Handbook of Industrial Organization, Vol. 3, ArmstrongMark, and PorterRobert, eds. Amsterdam: North-Holland:, 1967–2072.
12.
FarrellJoseph, and SalonerGarth (1985), “Standardization, Compatibility, and Innovation,”Rand Journal of Economics, 16 (1), 70–83.
13.
FisherDavid, and FisherMarshall (1997), “The Color War,”Invention & Technology, 3 (Winter), 8–18.
14.
GolderPeter N., and TellisGerard (1993), “Pioneer Advantage: Marketing Logic or Marketing Legend?”Journal of Marketing Research, 30 (May), 158–70.
15.
GuptaSunil, JainDipak, and SawhneyMohanbir (1999), “Modeling the Evolution of Markets with Indirect Network Externalities: An Application to Digital Television,”Marketing Science, 18 (3), 396–416.
16.
HannanMichael, and FreemanJohn (1984), “Structural Inertia and Organizational Change,”American Sociological Review, 49 (2), 149–64.
17.
HaruvyErnan, MahajanVijay, and PrasadAshutosh (2004), “The Effect of Piracy on the Market Penetration of Subscription Software,”Journal of Business, 77 (April), S81–S108.
18.
HinkleyDavid (1983), “Jackknife Methods,” in Encyclopedia of Statistical Science, Vol. 4, KotzS., JohnsonN.L., and ReadC.B., eds. New York: John Wiley & Sons, 280–87.
19.
KalbfleischJohn D., and PrenticeRoss L. (1980), The Statistical Analysis of Failure Time Data.New York: John Wiley & Sons.
20.
KatzMichael L., and ShapiroCarl (1985), “Network Externalities, Competition, and Compatibility,”American Economic Review, 75 (3), 424–40.
21.
KatzMichael L., and ShapiroCarl (1986), “Technology Adoption in the Presence of Network Externalities,”Journal of Political Economy, 94 (4), 822–41.
22.
KatzMichael L., and ShapiroCarl (1994), “System Competition and Network Effects,”Journal of Economic Perspectives, 8 (2), 93–115.
23.
KerinRoger A., VaradarajanP. Rajan, and PertersonRobert A. (1992), “First-Mover Advantage: A Synthesis, Conceptual Framework, and Research Propositions,”Journal of Marketing, 56 (October), 33–52.
24.
KimJeong-Yoo (2002), “Product Compatibility as a Signal of Quality in a Market with Network Externalities,”International Journal of Industrial Organization, 20 (7), 949–64.
25.
KindlebergerCharles P. (1983), “Standards as Public, Collective and Private Goods,”Kyklos, 36 (3), 377–96.
26.
LiebermanMarvin B., and MontgomeryDavid B. (1988), “First-Mover Advantages,”Strategic Management Journal, 9 (Summer), 41–58.
27.
LilienGary L., and YoonEunsang (1990), “The Timing of Competitive Market Entry: An Exploratory Study of New Industrial Products,”Management Science, 36 (5), 568–85.
28.
MinSungwook, KalwaniManohar K., and RobinsonWilliam T. (2006), “Market Pioneer and Early Follower Survival Risks: A Contingency Analysis of Really New Versus Incrementally New Product-Markets,”Journal of Marketing, 70 (January), 15–33.
29.
NairHarikesh, ChintaguntaPradeep, and DubéJean-Pierre (2004), “Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants,”Quantitative Marketing and Economics, 2 (1), 23–58.
30.
PorterJames N. (1983), “Flexible Disk Drives,” Disk/Trend report. Mountain View, CA: Disk/Trend Inc.
31.
PostrelSteven R. (1990), “Competing Networks and Proprietary Standards: The Case of Quadraphonic Sound,”Journal of Industrial Economics, 39 (2), 169–85.
32.
RobinsonWilliam T., and MinSungwook (2002), “Is the First to Market the First to Fail? Empirical Evidence for Industrial Goods Businesses,”Journal of Marketing Research, 36 (February), 120–28.
33.
SalonerGarth, and ShepardAndrea (1995), “Adoption of Technologies with Network Effects: An Empirical Examination of the Adoption of Automated Teller Machines,”RAND Journal of Economics, 26 (3), 479–501.
34.
SarkarM.B., EchambadiRaj, AgarwalRajshree, and SenBisakha (2006), “The Effect of the Innovative Environment on Exit of Entrepreneurial Firms,”Strategic Management Journal, 27 (6), 519–39.
35.
SchillingMelissa A. (2002), “Technology Success and Failure in Winner-Take-All Markets: The Impact of Learning Orientation, Timing and Network Externalities,”Academy of Management Journal, 45 (2), 387–98.
36.
ShankarVenkatesh, and BayusBarry L. (2003), “Network Effects and Competition: An Empirical Analysis of the Home Video Game Industry,”Strategic Management Journal, 24 (4), 375–84.
37.
ShapiroCarl, and VarianHal (1998), Information Rules.Boston: Harvard Business School Press.
38.
ShapiroCarl, and VarianHal (1999), “The Art of Standard Wars,”California Management Review, 41 (2), 8–32.
39.
SoodAshish, and TellisGerard J. (2005), “Technological Evolution and Radical Innovation,”Journal of Marketing, 69 (July), 152–68.
40.
SrinivasanRaji, LilienGary L., and RangaswamyArvind (2004), “First In, First Out? The Effects of Network Externalities on Pioneer Survival,”Journal of Marketing, 68 (January), 41–58.
41.
SrinivasanRaji, LilienGary L., and RangaswamyArvind (2006), “The Emergence of Dominant Designs,”Journal of Marketing, 70 (April), 1–17.
42.
StremerschStefan, TellisGerard J., FransesPhilip Hans, and BinkenJeroen (2007), “Indirect Network Effects in New Product Growth,”Journal of Marketing, 71 (July), 52–74.
43.
SunBaohong, XieJinhong, and CaoH. Henry (2004), “Product Strategy for Innovators in Markets with Network Effects,”Marketing Science, 23 (2), 243–54.
44.
TellisGerard, YinEdin, and NirajR. (2009) “Does Quality Win? Network Effects Versus Quality in High-Tech Markets,”Journal of Marketing Research, 46 (April), 135–49.
45.
XieJinhong, and SirbuMarvin (1995), “Price Competition and Compatibility in the Presence of Positive Demand Externalities,”Management Science, 41 (5), 909–926.
46.
XueXiaonan, and BrookmeyerRon (1996), “Bivariate Frailty Model for the Analysis of Multivariate Survival Time,”Lifetime Data Analysis, 2 (3), 277–89.
Supplementary Material
Please find the following supplemental material available below.
For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.
For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.
