A Model for Growth of Markets of Products or Services Having Hierarchical Dependence

Abstract

Many products and services can only achieve their intended functions and performance when being used in conjunction with or under the operation of other products and services. Such products and services, having varying degrees of hierarchical dependence, are becoming dominant in the global market. This trend has intensified in recent years as a result of the rapid growth in the use of networked technology, and is particularly visible in computer and Internet related products and services. The growth of the user population of these products or services is a result of collective decision behavior of users and prospective users as well as the hierarchical dependence of the streams of products or services. Based on construction of a networked community and two fundamental decision-making behavior, we derive a model in the form of ordinary differential equations (ODEs) that describe the growth of the user population of such hierarchically dependent products or services. Then, we use this model to examine real-life data. Specifically, the game software market, being dependent hierarchically upon three video game consoles and two handheld game consoles, will be analyzed as an application example. Furthermore, we analyze the historical growth data of a variety of products and services. Results show that all these data follow our growth equation, and the numerical algorithm for estimating the model parameters allows important market information hidden in the data to be unveiled, such as the relative effectiveness of customer service and promotional efforts, spending power of users, effective market size, and market growth rate.