Skip to main content
SpringerLink
Log in

Software quality and backward compatibility in the video game industry

  • Published:
Journal of Industrial and Business Economics Aims and scope Submit manuscript

Abstract

The video game industry is a platform market in which consumers derive value from a console based on the availability of software. This article examines the role of the quality of software in determining sales of associated hardware. I investigate this using data on the seventh generation of video game consoles (Xbox 360, PlayStation 3, and Wii). Using aggregated review scores from Metacritic, I build a novel measure of accumulated quality for both current-generation and backward compatible software for each console. Using an instrumental variables approach, I estimate the effects of these quality measures on weekly console sales. I find that overall software quality has a significant positive impact on hardware sales, while backward compatible software has a much smaller positive effect. Additionally, I incorporate a reliability measure into the estimation and discuss the console industry in the context of platform markets and durable goods.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7

Similar content being viewed by others

Notes

  1. Source: https://www.bbc.co.uk/archive/the-8-generations-of-video-game-consoles/zvcjkty.

  2. http://www.metacritic.com/about-Metascores.

  3. https://www.gamespot.com/articles/obsidian-denied-bonus-over-new-vegas-metacritic-score-studio-head/1100-6366337/.

  4. http://support.xbox.com/en-US/xbox-on-other-devices/original-console/play-original-games.

  5. Data on the patches was collected from the website of prominent Microsoft employee Larry Hryb (http://majornelson.com), game news site IGN (http://www.ign.com) and corroborated using archived versions of Microsoft’s official list found using the Wayback Machine (https://archive.org/web/). Several games made early appearances on the compatibility list, but as of the current list, have been cut. I have omitted these games from the data. Appendix 2 gives a full list of sources.

  6. http://www.vgchartz.com/.

  7. Sources for the changing MSRP are listed in appendix 2

  8. https://www.squaretrade.com/htm/pdf/SquareTrade_Xbox360_PS3_Wii_Reliability_0809.pdf.

  9. In both papers, data on competitors are used as instruments. In particular, Hahn, Koh, and Niculescu use lags of competitor sales.

References

  • Angrist, J. D., & Pischke, J.-S. (2009). Mostly Harmless Econometrics. Princeton, NJ: Princeton University Press.

    Book  Google Scholar 

  • Armstrong, M. (2006). Competition in two-sided markets. The Rand Journal of Economics, 27(3), 668–691.

    Article  Google Scholar 

  • Besanko, D., & Winston, W. L. (1990). Optimal price skimming by a monopolist facing rational consumers. Management Science, 36(3), 668–691.

    Google Scholar 

  • Besanko, D., & Winston, W. L. (1991). Optimal pricing of a product with periodic enhancements. European Journal of Operational Research, 55(2), 268–278.

    Article  Google Scholar 

  • Caillaud, B., & Jullien, B. (2003). Chicken & egg: Competition among intermediation service providers. The Rand Journal of Economics, 34(2), 309–328.

    Article  Google Scholar 

  • Cennamo, C. (2016). Building the value of next-generation platforms: The paradox of diminishing returns. Journal of Management, 344(8), 3038–3069.

    Article  Google Scholar 

  • Cennamo, C., & Santalo, J. (2013). Platform competitioin: Strategic trade-offs in platform markets. Strategic Management Journal, 34, 1331–1350.

    Article  Google Scholar 

  • Claussen, J., Kretschmer, T., & Spengler, T. (2016). Benefitting colleagues but not the city: Localized spillovers from the relocation of superstar inventors. Working paper.

  • Clements, M. T., & Ohashi, H. (2005). Indirect network effects and the product cycle: Video games in the U.S., 1994–2002. The Journal of Industrial Economics, 53(4), 515–542.

  • Coase, R. H. (1972). Durability and monopoly. Journal of Law and Economics, 15(1), 143–149.

    Article  Google Scholar 

  • Corts, K. S., & Lederman, M. (2009). Software exclusivity and the scope of indirect network effects in the u.s. home video game market. International Journal of Industrial Organization, 27, 121–136.

  • Derdenger, T. (2014). Technological tying and the intensity of price competition: An empirical analysis of the video game industry. Quantitiative Marketing and Economics, 12(2), 127–165.

    Article  Google Scholar 

  • Economides, N. (2000) Durable goods monopoly with network externalities with application to the pc operating systems market. Quarterly Journal of Electronic Commerce, 1(3).

  • Ellison, G., & Fudenberg, D. (2000). The neo-luddite’s lament: Excessive upgrades in the software industry. The Rand Journal of Economics, 31(2), 253–272.

    Article  Google Scholar 

  • Fudenberg, D., & Tirole, J. (1998). Upgrades, tradeins, and buybacks. The Rand Journal of Economics, 29(2), 235–258.

    Article  Google Scholar 

  • Hałaburda, H., Jullien, B., & Yehezkel, Y. (2020). Dynamic competition with network externalities: How history matters. Technical Report 1.

  • Hann, I.-H., Koh, B., & Niculescu, M. F. (2016). The double-edged sword of backward compatibility: The adoption of multigenerational platforms in the presence of intergenerational services. Information Systems Research, 27(1), 112–130.

    Article  Google Scholar 

  • Ishihara, M., & Ching, A. (2017). Dynamic demand for new and used durable goods without physical depreciation: The case of Japanese video games. Working paper 2189871, Rotman School of Management.

  • Johnson, D.,  Watling, C.,  Gardner, J., & Nacke, L.E. (2014). The edge of glory: The relationship between metacritic scores and player experience. CHI Play, pages 141–150, New York, NY, 2014. Association for Computing Machinery.

  • Kaiser, U., & Wright, J. (2006). Price structure in two-sided markets: Evidence from the magazine industry. International Journal of Industrial Organization, 24(1), 1–28.

    Article  Google Scholar 

  • Kim, B.-C., Lee, J., & Park, H. (2017). Two-sided platform competition with multihoming agents: An empirical study on the daily deals market. Information Economics and Policy, 41, 36–53.

    Article  Google Scholar 

  • Kim, J.-H., Prince, J., & Qiu, C. (2014). Indirect network effects and the quality dimension: A look at the gaming industry. International Journal of Industrial Organization, 37, 99–108.

    Article  Google Scholar 

  • Kretschmer, T., & Claussen, J. (2016). Generational transitions in platform markets—the role of backward compatibility. Strategy Science, 1(2), 71–128.

    Article  Google Scholar 

  • Lee, R. (2013). Vertical integration and exclusivity in platform and two-sided markets. American Economic Review, 103(7), 2960–3000.

    Article  Google Scholar 

  • Nair, H. (2007). Intertemporal price discrimination with forward-looking consumers: Application to the US market for console video-games. Quantitative Marketing and Economics, 5(3), 239–292.

    Article  Google Scholar 

  • Rochet, J.-C., & Tirole, J. (2003). Platform competition in two-sided markets. Journal of the European Economic Association, 1(4), 990–1029.

    Article  Google Scholar 

  • Rysman, M. (2004). Competition between networks: A study of the market for yellow pages. The Review of Economic Studies, 71(2), 438–512.

    Article  Google Scholar 

  • Rysman, M. (2007). An emprical analysis of payment card usage. The Journal of Industrial Economics, 55(1), 1–36.

    Article  Google Scholar 

  • Sherrick, B., & Schmierbach, M. (2016). The effects of evaluative reviews on market success in the video game industry. The Computer Games Journal, 5(3–4), 185–194.

    Article  Google Scholar 

  • Song, H., Jung, J., & Cho, D. (2017). Platform competition in the video game console industry: Impacts of software quality and exclusivity on market share. Journal of the Academy of Marketing Science, 47, 394–416.

    Google Scholar 

  • Waldman, M. (2003). Durable goods theory for real world markets. Journal of Economic Perspectives, 17(1), 131–154.

    Article  Google Scholar 

  • Waldman, M. (2008). Durable goods markets and aftermarkets. In S. N. Durlauf & L. E. Blume (Eds.), The New Palgrave Dictionary of Economics (pp. 563–567). Basingstoke: Palgrave Macmillan.

    Google Scholar 

  • Waldman, M. (1996). Durable Goods Pricing When Quality Matters. The Journal of Business, 69(49), 489–510.

  • Wilbur, K. C. (2008). A two-sided, empirical model of television advertising and viewing markets. Marketing Science, 27(3), 356–378.

    Article  Google Scholar 

  • Zhu, F., & Iansiti, M. (2012). Entry into platform-based markets. Strategic Management Journal, 33, 88–106.

    Article  Google Scholar 

Download references

Acknowledgements

I thank the editor and the two anonymous reviewers and seminar participants at Purdue University, Indiana University, and the University of South Dakota for their helpful comments.

Author information

Authors and Affiliations

  1. Beacom School of Business, University of South Dakota, 414 E. Clark St., Vermillion, SD, 57069, USA

    Sebastian Wai

Authors
  1. Sebastian Wai
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Sebastian Wai.

Ethics declarations

Conflict of interest

On behalf of all authors, the corresponding author states that there is no conflict of interest.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

1.1 Instrument relevance

Relevance of the instruments is a requirement for the two-stage least squares method to obtain unbiased estimates. Following Angrist and Pischke’s (2009) approach, I examine the F statistics in the first-stage regressions. Table 5 shows all relevant first-stage regressions in from the two-stage least squares regressions from Table 4. The final row of the table indicates which columns from Table 4 correspond to each. In all cases, the F statistics are large and show a high level of overall statistical significance. The cross-quality lag instruments are shown at the top of each table and all appear individually significant, as well.

Table 5 First-stage regression results
Full size table

1.2 MSRP and backward compatibility data sources

In this appendix, I list the news stories and press releases used to construct data on each console’s MSRP and backward compatibility. Some sources are no longer available and I use the Internet Archive’s Wayback Machine to access.

Data on the Xbox 360’s MSRP come from the following sources:

There were a total of 9 Xbox 360 backward compatibility patches released from 2005 to 2007. Backward compatibility to original Xbox titles was added individually in each patch. Most of the data comes from Larry Hryb’s website (http://majornelson.com). Hryb has worked in Microsoft’s Xbox division since 2003 and was involved with the Xbox 360’s development from its inception. Based on the sources below, I manually coded each game to add to the Xbox 360’s backward compatibility score on the appropriate date.

  1. 1.

    11-11-05: http://www.ign.com/articles/2005/11/12/backwards-compatible-titles-revealed

  2. 2.

    12-09-05: http://majornelson.com/2005/12/09/xbox-360-bc-list-updated/

  3. 3.

    3-29-06: https://web.archive.org/web/20061211094049/http://www.majornelson.com/archive/2006/03/29/xbox-360-back-compat-update.aspx

  4. 4.

    6-13-06: http://www.ign.com/articles/2006/06/13/backward-compatibility-update-2

  5. 5.

    8-28-06: http://majornelson.com/2006/08/28/august-2006-back-compat-update/

  6. 6.

    12-14-06: http://majornelson.com/2006/12/14/december-06-back-compat-update/

  7. 7.

    4/9/07: http://majornelson.com/2007/04/19/april-07-back-compat-update/

  8. 8.

    7-12-07: http://majornelson.com/2007/07/12/july-2007-back-compat-update/

  9. 9.

    11-27-07: http://majornelson.com/2007/11/27/november-07-back-compat-update/

Several games were eventually cut from the final backward compatibility list (https://www.lifewire.com/xbox-og-360-backward-compatibility-list-3563148). I omit these from the backward compatibility calculation.

Data on the PlayStation 3’s MSRP come from the following sources:

Only the original 20gb and 60gb PlayStation 3 models were backward compatible with PlayStation 2 games (https://www.lifewire.com/can-your-ps3-play-ps2-games-2717135). Once these were discontinued, backward compatibility ended.

Data on the Wii’s MSRP come from the following sources:

Early Wii models were fully backward compatible with GameCube games. Backward compatibility ended when the original model was replaced by the Wii Family Edition (http://www.nintendolife.com/news/2011/08/current_wii_model_to_be_discontinued) in 2011.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Wai, S. Software quality and backward compatibility in the video game industry. J. Ind. Bus. Econ. 49, 545–570 (2022). https://doi.org/10.1007/s40812-022-00224-2

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40812-022-00224-2

Keywords

JEL Classification

Search

Navigation