Intra-Standard Competition: The Joint Impact of an Installed-User Base and a Supporting-Firm Base in Markets with Network Effects

Abstract

The literature on network effects has demonstrated the value of an installed-user base (i.e., the number of adopters increases the value of the new product) and a supporting-firm base (i.e., the number of supporting firms increases the value of the underlying new technology) in the success of a new technology in markets with network effects. However, little is known about how the installed-user base and supporting-firm base jointly affect interactions between an innovator and other firms in the supporting-firm base (i.e., its rivals) over a product life cycle. Specifically, this paper argues that in the presence of both an installed-user-base effect and a supporting-firm-base effect, the nature of interactions between the innovator and its rivals will vary across the life cycle of a new technology and thus exhibit a stage-dependent pattern. Based on data from two markets with network effects—the floppy disk drive market and the personal digital assistant market—our empirical analysis reveals some interesting findings. First, the installed-user-base effect and the supporting-firm-base effect influence firms’ competitive behavior in opposite directions: the former encourages price competition while the latter encourages cooperation. Second, the competitive structure in these markets has not been fixed but is rather stage-dependent; that is, firms behaved cooperatively in the early stage, competitively in the middle stage, and then less competitively in the late stage of the new technology life cycle. These findings have important implications for innovators in determining the allocation of limited resources designed to spur the success of a new techn`ology.