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Technological tying and the intensity of price competition: An empirical analysis of the video game industry

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  • Timothy Derdenger

Abstract

Using data from the 128-bit video game industry I evaluate the impact technologically tying has on the intensity of console price competition and the incentives for hardware firms to tie their produced software to their hardware. Tying occurs when a console hardware manufacturer produces software that is incompatible with rival hardware. There are two important trade-offs an integrated firm faces when implementing a technological tie. The first is an effect that increases console market power and forces hardware prices higher. The second, an effect due to the integration of the firm, drives prices lower. A counterfactual exercise determines technological tying of hardware and software increases console price competition; console makers subsidize consumer hardware purchases in order to increase video games sales, in particular their tied games, where the greatest proportion of industry profits are made. I also determine technological tying to be a dominant strategy for hardware manufacturers when software development costs are low. Copyright Springer Science+Business Media New York 2014

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  • Timothy Derdenger, 2014. "Technological tying and the intensity of price competition: An empirical analysis of the video game industry," Quantitative Marketing and Economics (QME), Springer, vol. 12(2), pages 127-165, June.
    • Handle: RePEc:kap:qmktec:v:12:y:2014:i:2:p:127-165
    DOI: 10.1007/s11129-014-9143-9
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    2. Wang, Jin, 2021. "Do birds of a feather flock together? Platform’s quality screening and end-users’ choices theory and empirical study of online trading platforms," International Journal of Industrial Organization, Elsevier, vol. 75(C).
    3. Yiyi Zhou, 2017. "Bayesian Estimation of a Dynamic Model of Two-Sided Markets: Application to the U.S. Video Game Industry," Management Science, INFORMS, vol. 63(11), pages 3874-3894, November.
    4. Carrillo, Juan D. & Tan, Guofu, 2021. "Platform competition with complementary products," International Journal of Industrial Organization, Elsevier, vol. 77(C).
    5. Takanori Adachi & Susumu Sato & Mark J. Tremblay, 2023. "Platform Oligopoly with Endogenous Homing: Implications for Mergers and Free Entry," Journal of Industrial Economics, Wiley Blackwell, vol. 71(4), pages 1203-1232, December.
    6. Stefan Koch & Michael Bierbamer, 2016. "Opening your product: impact of user innovations and their distribution platform on video game success," Electronic Markets, Springer;IIM University of St. Gallen, vol. 26(4), pages 357-368, November.
    7. Avery Haviv & Yufeng Huang & Nan Li, 2020. "Intertemporal Demand Spillover Effects on Video Game Platforms," Management Science, INFORMS, vol. 66(10), pages 4788-4807, October.
    8. Mingyu Joo & Dinesh K. Gauri & Kenneth C. Wilbur, 2020. "Temporal Distance and Price Responsiveness: Empirical Investigation of the Cruise Industry," Management Science, INFORMS, vol. 66(11), pages 5362-5388, November.
    9. Sebastian Wai, 2022. "Software quality and backward compatibility in the video game industry," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 49(3), pages 545-570, September.
    10. Wallis, Hannah & Nachreiner, Malte & Matthies, Ellen, 2016. "Adolescents and electricity consumption; Investigating sociodemographic, economic, and behavioural influences on electricity consumption in households," Energy Policy, Elsevier, vol. 94(C), pages 224-234.
    11. Pradeep K. Chintagunta & Marco Shaojun Qin & Maria Ana Vitorino, 2018. "Licensing and Price Competition in Tied-Goods Markets: An Application to the Single-Serve Coffee System Industry," Marketing Science, INFORMS, vol. 37(6), pages 883-911, November.
    12. Soo Jin Kim & Pallavi Pal, 2021. "Quality Differentiation and Optimal Pricing Strategy in Multi-Sided Markets," CESifo Working Paper Series 9267, CESifo.
    13. Yufeng Huang, 2022. "Tied Goods and Consumer Switching Costs," Marketing Science, INFORMS, vol. 41(1), pages 93-114, January.
    14. Masakazu Ishihara & Eitan Muller, 2020. "Software piracy and outsourcing in two-sided markets," Quantitative Marketing and Economics (QME), Springer, vol. 18(1), pages 61-124, March.
    15. Shivam Somani, 2024. "The Impact of Acquisition on Product Quality in the Console Gaming Industry," Papers 2406.02525, arXiv.org.

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    More about this item

    Keywords

    Platform markets; Tying; Video game industry; D40; L11; L40; L82;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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