NDLI: Vertical Integration and Two-Sided Market Pricing : Evidence from the Video Game Industry

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Vertical Integration and Two-Sided Market Pricing : Evidence from the Video Game Industry

Content Provider	Semantic Scholar
Author	Derdenger, Timothy P.
Copyright Year	2008
Abstract	This paper evaluates the e¤ects of vertical integration on two-sided market prices using data from the 128 bit video game industry which consists of Nintendo Gamecube, Sony Playstation 2 and Microsoft Xbox. Estimation of video game console demand deviates from previous research on network externalities by incorporating video game heterogeneity and software competition into the indirect network e¤ectconsumers differentiate between a "hit" and a "bust" game rather than assuming video games are homogeneous. After the construction of an empirical model I investigate the outcome of vertical integration on console prices. There are two important trade-o¤s to vertical integration. The rst is a demand e¤ect which further di¤erentiates consoles and forces prices higher. The second, a market structure e¤ect, drives prices lower. A counterfactual exercise determines the market structure e¤ect dominates the demand e¤ect for all consoles which leads to lower prices or an increase in console competition when vertical integration is permitted. However, the increase price competition is found to benet console manufacturers. Lower prices lead to a rise in the number of consoles sold which generates greater demand for video games, where the "real" prots are made. Console makers are thus willing to forego lower console prices in order to increase video game sales, in particular their own developed games. Lastly, my model which accounts for video game heterogeneity and software competition provides a better t to the data than the previous models found in the literature. JEL Classication: L13, L14, L22, L42, L86
File Format	PDF HTM / HTML
Alternate Webpage(s)	http://idei.fr/sites/default/files/medias/doc/conf/sic/papers_2009/derdenger.pdf
Language	English
Access Restriction	Open
Content Type	Text
Resource Type	Article

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