Survival in Markets with Network Effects: Product Compatibility and Order-of-Entry Effects

Abstract

This article proposes a new conceptual framework in which the impact of network effects (NE) on a pioneer's survival advantage compared with its early followers can be positive or negative depending on two important but previously ignored market characteristics: (1) cross-generation product compatibility and (2) within-generation product compatibility. The authors empirically test the theoretical predictions using data from 45 NE markets. They show that these two types of compatibility affect the pioneer's survival advantage in opposite directions and that such directions are reversed when NE changes from extremely strong to extremely weak. Specifically, in markets with strong NE, cross-generation incompatibility harms but within-generation incompatibility favors the pioneer's survival advantage. Consequently, pioneers are likely to enjoy a survival advantage when their product is cross-generation compatible but within-generation incompatible. However, in markets with weak NE, pioneer survival advantage is likely to occur under opposite conditions (i.e., cross-generation incompatible but within-generation compatible). The policy analysis further suggests that the best survival condition for pioneers often turns out to be the worst for followers in these markets.