Quantitative Analysis of Network Externalities in Competing Technologies: The VCR Case

We develop a dynamic structural model of consumers' choices and producers' pricing in an oligopolistic market for newly introduced durable products with network externalities. The model is then applied to empirically analyze the de facto standardization of the VHS format in the U.S. home VCR market during 1981-1988. We find: (i) the network advantage of VHS explains at least 70.3% to 86.8% of (the logarithm of) relative sales of VHS to Betamax in each year; (ii) an increase in the network advantage of VHS was an engine of tipping toward the VHS format; and (iii) in the early 1980s, the network advantage of VHS was mainly due to its expected growth advantage. © 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.