Does Quality Win? Network Effects versus Quality in High-Tech Markets

Researchers disagree about the critical drivers of success in and efficiency of high-tech markets. On the one hand, some researchers assert that high-tech markets are efficient with best-quality brands being dominant. On the other hand, many scholars suspect that network effects lead to perverse markets in which the dominant brands do not have the best quality. The authors develop scenarios about the relative importance of these effects and the efficiency of markets. Empirical analysis of historical data on 19 categories shows that though both quality and network effects affect market share flows, in general markets are efficient. In particular, market share leadership changes often, switches in share leadership closely follow switches in quality leadership, and the best-quality brands, not the ones that are first to enter, dominate the market. Network effects enhance the positive effect of quality.

[1]  C. Granger.  Investigating Causal Relations by Econometric Models and Cross-Spectral Methods , 1969 .

[2]  C. Sims.  Money, Income, and Causality , 1972 .

[3]  H. H. Kassarjian.  Content Analysis in Consumer Research , 1977 .

[4]  Brian T. Ratchford,et al.  The Value of Information for Selected Appliances , 1980 .

[5]  D. Mclagan,et al.  Market share: Key to profitability? , 1981 .

[6]  G. Maddala.  Limited-dependent and qualitative variables in econometrics: Introduction , 1983 .

[7]  Carlisle E. Moody,et al.  Quality, Price, Advertising, and Published Quality Ratings , 1983 .

[8]  R. D. Buzzell,et al.  Product Quality, Cost Position and Business Performance: A Test of Some Key Hypotheses , 1983 .

[9]  P. Schmidt,et al.  Limited-Dependent and Qualitative Variables in Econometrics. , 1984 .

[10]  C. Hjorth-Andersen,et al.  The Concept of Quality and the Efficiency of Markets for Consumer Products , 1984 .

[11]  R. Brodie,et al.  Attraction versus Linear and Multiplicative Market Share Models: An Empirical Evaluation , 1984 .

[12]  Scott A. Neslin,et al.  A Comparison of Market Share Models and Estimation Procedures , 1984 .

[13]  K. Moorthy.  Market Segmentation, Self-Selection, and Product Line Design , 1984 .

[14]  D. Aaker,et al.  Is Market Share all that It's Cracked up to Be? , 1985 .

[15]  Joseph Farrell,et al.  Standardization, Compatibility, and Innovation , 1985 .

[16]  Joseph Farrell,et al.  Installed base and compatibility : innovation, product preannouncements and predation , 1986 .

[17]  David J. Curry,et al.  Indexing product quality: Issues, theory, and results. , 1986 .

[18]  George B. Sproles.  The Concept of Quality and the Efficiency of Markets: Issues and Comments , 1986 .

[19]  C. Shapiro,et al.  Technology Adoption in the Presence of Network Externalities , 1986, Journal of Political Economy.

[20]  D. Aaker,et al.  The Strategic Role of Product Quality , 1987 .

[21]  Gerard J. Tellis,et al.  Competitive Price and Quality Under Asymmetric Information , 1987 .

[22]  G. Tellis.  The Price Elasticity of Selective Demand: A Meta-Analysis of Econometric Models of Sales , 1988 .

[23]  Lee G. Cooper,et al.  Market-Share Analysis: Evaluating Competitive Marketing Effectiveness , 1988 .

[24]  Wagner A. Kamakura,et al.  Measuring Market Efficiency and Welfare Loss , 1988 .

[25]  K. Moorthy,et al.  Product and Price Competition in a Duopoly , 1988 .

[26]  C. Fornell,et al.  The Relationship between Advertising and Product Quality over the Product Life Cycle: A Contingency Theory , 1988 .

[27]  Neil Gandal,et al.  Complementary network externalities and technological adoption , 1993 .

[28]  D. Hoffman,et al.  Generalizing the Sensitivity Conditions in an Overall Index of Product Quality , 1992 .

[29]  C. Shapiro,et al.  Product Introduction with Network Externalities , 1992 .

[30]  John B. Willett,et al.  It’s About Time: Using Discrete-Time Survival Analysis to Study Duration and the Timing of Events , 1993 .

[31]  G. Tellis,et al.  Pioneer Advantage: Marketing Logic or Marketing Legend? , 1993 .

[32]  R. Rust,et al.  Why Improving Quality Doesn't Improve Quality (or Whatever Happened to Marketing?) , 1993 .

[33]  D. Aaker,et al.  The Financial Information Content of Perceived Quality , 1994 .

[34]  Joseph Farrell,et al.  Choosing How to Compete: Strategies and Tactics in Standardization , 1994 .

[35]  C. Shapiro,et al.  Systems Competition and Network Effects , 1994 .

[36]  D. North.  Competing Technologies , Increasing Returns , and Lock-In by Historical Events , 1994 .

[37]  S. Liebowitz,et al.  Path Dependence, Lock-In, and History , 1995 .

[38]  Gerard J. Tellis,et al.  First to Market, First to Fail? Real Causes of Enduring Market Leadership , 2006 .

[39]  Philip Gummett,et al.  Peddling prosperity , 1996, Nature.

[40]  Gregory S. Carpenter,et al.  Late Mover Advantage: How Innovative Late Entrants Outsell Pioneers: , 1998 .

[41]  D. Jain,et al.  Modeling the Evolution of Markets with Indirect Network Externalities: An Application to Digital Television , 1999 .

[42]  R. Jacobson,et al.  Market Share and Customers’ Perceptions of Quality: When Can Firms Grow Their Way to Higher versus Lower Quality? , 1999 .

[43]  Hao Zhao.  Raising Awareness and Signaling Quality to Uninformed Consumers: A Price-Advertising Model , 2000 .

[44]  P. N. Golder.  Historical Method in Marketing Research with New Evidence on Long-Term Market Share Stability , 2000 .

[45]  C. Granger.  Investigating causal relations by econometric models and cross-spectral methods , 1969 .

[46]  G. Tellis,et al.  Will & Vision: How Latecomers Grow to Dominate Markets , 2001 .

[47]  Venkatesh Shankar,et al.  Network Effects and Competition: An Empirical Analysis of the Home Video Game Industry , 2002 .

[48]  Harikesh S. Nair,et al.  Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants , 2004 .

[49]  Philip Hans Franses,et al.  Optimal Data Interval for Estimating Advertising Response , 2006 .

[50]  G. Tellis,et al.  The Value of Quality: Stock Market Returns to Published Quality Reviews , 2007 .

[51]  Kristina Shampanier,et al.  Zero as a Special Price: The True Value of Free Products , 2007 .

[52]  Gerard J. Tellis,et al.  The Value of Quality: Stock Market Returns to Published Quality Reviews , 2008 .

[53]  Jinhong Xie,et al.  Survival in Markets with Network Effects: Product Compatibility and Order-of-Entry Effects , 2010 .