Product Quality and New Product Performance: The Role of Network Externalities and Switching Costs*

Abstract

Research about the critical drivers of new product success is perhaps one of the thorniest issues confronting academic research in the field. Among them, product quality is considered a crucial element to obtain a competitive advantage. However, empirical evidence suggests low returns on product quality investments in new products, and consequent manager claims for an explanation of whether quality investments are fruitful for the firm. Recently, a new research stream has suggested that the role of other complementary products (indirect network externalities) and the critical mass of adopters (direct network externalities) lead to higher market returns than quality itself. Moreover, researchers disagree about the perverse or positive effects that the switching costs associated with the product have on the short‐ and long‐term performance of the firm. In this paper, we propose that, as products and technologies become more interconnected, the associated network effects and switching costs will play an important role with regard to new product performance, both independently and in conjunction with its quality. We empirically test a model that relates product quality, network effects, and switching costs to short‐term/long‐term new product performance, using data collected from 255 innovative products. The data analysis indicates that network effects, and consumers' switching costs, can modify previous findings with regard to the isolated product quality consequences concerning new product performance. Overall, the results of this study may help firms manage the relationship between quality, network externalities, and switching costs more efficiently, both in the short term and in the long term.