Title
Network Effects in Technology Adoption:The Case of DVD Players
Author
Pinar Karaca-Mandic, University of California, Berkeley
Date
1/01/2005
(Original Publish Date: 9/8/2003)
(Original Publish Date: 9/8/2003)
Abstract
This paper analyzes a model of consumer adoption of DVD players (the hardware-side) and movie studios' supply of movies on DVD discs (the softwareside). My primary focus is the estimation of complementarities between DVD player adoption and availability of content on DVD discs. The size of the complementarities determine the level of strategic inter-dependence between hardware and software firms, and thus play an important role in designing co-marketing strategies through which hardware and software firms can align their incentives. I estimate the parameters of the hardware adoption using household level panel data. To estimate the parameters of the software model, I use a cross section of movies released at different time periods. Estimated complementarities are statistically and economically significant. The hardware-side estimation shows that a 1% increase in new DVD releases during May 2001 would increase DVD player sales by 0.5%. The softwareside estimation indicates that a 1% increase in DVD player installed base in May 2001 increases the number of new DVD releases by 0.19%. Finally, I present two examples that outline the strategic implications of the estimated complementarities. In particular, I examine the amount of subsidy the movie studios would be willing to give to increase DVD player sales by 1 more unit, and the amount of subsidy the DVD player manufacturers would be willing to give to increase new DVD releases by one more unit.