1 Department of Innovation and Organizational Economics, Copenhagen Business School2 Ludwig-Maximillians-Universität Munich
Setting Technology Levels in Complementary Goods Markets
In most markets, higher technological quality directly translates into higher consumer utility. However, many new products do not work standalone but require the availability of a complementary product. In these markets, pushing a product closer to the technological frontier can have detrimental effects as this excludes increasing numbers of consumers whose complementary products no longer function with the focal product. Firms therefore have to balance product quality against market size. Technological change brings a dynamic perspective to this tradeoff as it renders existing technology obsolete but also increases performance of the complementary products, therefore increasing market potential. We study these mechanisms in the empirical context of computer games. In line with our expectations, we find an inverted U-shaped relationship between closeness to the frontier and sales revenues as well as differential effects of technological change depending on initial technological quality.
Technological Frontier; Computer Games Industry; Technological Change
Main Research Area:
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