Quantitative Marketing and Economics

, Volume 12, Issue 2, pp 127–165 | Cite as

Technological tying and the intensity of price competition: An empirical analysis of the video game industry

Article

Abstract

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.

Keywords

Platform markets Tying Video game industry 

JEL Classifications

D40 L11 L40 L82 

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Marketing & Strategy, Tepper School of BusinessCarnegie Mellon UniversityPittsburghUSA

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