Technological tying and the intensity of price competition: An empirical analysis of the video game industry
- Timothy Derdenger
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Using data from the 128-bit video game industry I evaluate the impact technologically tying has on the intensity of console price competition and the incentives for hardware firms to tie their produced software to their hardware. Tying occurs when a console hardware manufacturer produces software that is incompatible with rival hardware. There are two important trade-offs an integrated firm faces when implementing a technological tie. The first is an effect that increases console market power and forces hardware prices higher. The second, an effect due to the integration of the firm, drives prices lower. A counterfactual exercise determines technological tying of hardware and software increases console price competition; console makers subsidize consumer hardware purchases in order to increase video games sales, in particular their tied games, where the greatest proportion of industry profits are made. I also determine technological tying to be a dominant strategy for hardware manufacturers when software development costs are low.
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- Technological tying and the intensity of price competition: An empirical analysis of the video game industry
Quantitative Marketing and Economics
Volume 12, Issue 2 , pp 127-165
- Cover Date
- Print ISSN
- Online ISSN
- Springer US
- Additional Links
- Platform markets
- Video game industry
- Author Affiliations
- 1. Marketing & Strategy, Tepper School of Business, Carnegie Mellon University, Pittsburgh, PA, USA