Intra-Standard Competition : The Joint Impact of Installed-User Base and Supporting-Firm Base in Markets with Network Effects

While extant literature of network effects suggests the importance of the competitors' support to the innovator's new technology in markets with network effects, it is largely unknown HOW the innovator competitively interacts with its supporting firms. This paper empirically examines price competition between an innovator and its imitators in markets with network effects. Specifically, we examine how an installed-user base (i.e., the number of users adopting the same product) and a supporting-firm base (i.e., the number of firms supporting the same technological standards) jointly affect competition. Our empirical analysis of the 3.5-inch floppy disk drive market reveals interesting findings. First, while previous empirical studies of network effects have demonstrated the positive impacts of both the installed-user base and the supporting-firm base on demand, we find that the two effects impact firms' competitive behavior in opposite directions: The installed-user-base effect encourages price competition, while the supporting-firm-base effect encourages cooperation. Second, we show that the competitive structure of the floppy drive market over the period studied was not constant but rather stage-dependent: Firms behaved cooperatively in the early stage, competitively in the middle stage, and cooperatively again in the late stage of the product life cycle. Our findings provide important managerial implications to innovators on how to form most effective supporting-firm base and thereby to increase the chances of new product success in markets with network effects