Strategic maneuvering and standardization in the presence of network externalities: a simulation study of the VCR case

Abstract

Based on counterfactual simulations of the U.S. home VCR market during the years 1981-1988, we study the dynamics of the impacts of strategic maneuvering by sponsoring firms on de facto standardization in the presence of network externalities. The adoption of the VMS format in the U.S. home VCR market is a well-known example of de facto standardization in the presence of network externalities. During this tipping and de facto standardization process, however, there was strategic maneuvering by the Betamax sponsor to push the sales of Betamax in 1983 and 1987, which created only temporary interruptions. The counterfactual simulations, however, indicate that the sponsor of Betamax could have reversed the tipping process if it had been able to begin to push as aggressively from year 1983 as it did in year 1987. On the other hand, the observation that the big push in 1987 did not affect the tipping process toward VHS implies the significance of an applications barrier to entry due to network externalities.