Causes and Consequences of Market Leadership in Application Software

Abstract

This paper examines several software markets in the hopes of testing various hypotheses that have been put forward in the literature on network effects. Our primary interest focuses on the possibility of lock-in by inferior products due to network effects. We also examine whether or not these markets provide evidence for winner-take-all results and tipping. We use a case method approach, examining product quality, market shares and prices in the context of major software application markets. We find no support for the lock-in hypothesis, no support for tipping, but support for winner-take-all. It is unclear, however, whether this winner-take-all result is due to network effects or other factors such as instant scalability or economies to scale. We also find that price seems to be play an important role in generating market share only in consumer markets. As a by-product of this work we are able to examine Microsoft's track-record in these markets. We conclude that Microsoft has followed a low price strategy, more so after they have achieved large market shares than while they were attempting to wrest market share from other firms.