Simulating Indirect Network Effects in the Video Game Market

Abstract

Since the 1970s, seven generations of consoles have competed in the video games market. Today video game industry sales even surpass the box-office results of the movie industry. The history of video games provides numerous examples of former successful console vendors failing to establish technologically superior successors of their consoles. This is mostly due to dependencies of console manufacturers on game publishers. Therefore, this paper examines strategies of console vendors against the background of indirect network effects on the video game market. We apply a simulation approach based on the agent-based computational economics paradigm to simulate an artificial video game market consisting of console vendors, game publishers and customers. This enables the examination of various competition scenarios. As an example application of our model we evaluate pricing strategies of console manufacturer showing that penetration pricing is a possible way to gain ground in the market or even to increase revenues