Diffusion of a new product under network effects: the US DVD market
İnceoğlu, Fırat and Park, Minsoo (2011) Diffusion of a new product under network effects: the US DVD market. Applied Economics, 43 (30). pp. 4803-4815. ISSN 0003-6846 (Print) 1466-4283 (Online)
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Official URL: http://dx.doi.org/10.1080/00036846.2010.498358
We formulate a model that captures the inter-dependence between hardware demand and software supply - indirect network effect - in the DVD industry. The identification of the network effect comes from the difference in software availability across two different formats: VHS and DVD. We find that a 1% increase in the number of DVD titles raises the demand for DVD players by 0.87%. Simultaneously, a 1% increase in video player ownership leads to a 0.14% increase in the variety of video titles. Our simulations show that hardware manufacturers might be able to internalize the network externality to increase total industry revenues.
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