Network Externalities in Online Video Games: An Empirical Analysis Utilizing Online Product Ratings
Marketing Letters, Forthcoming
18 Pages Posted: 6 Sep 2015
Date Written: July 1, 2015
Abstract
Video games have become a major contributor to the US and global economy. This paper studies network externalities in the online video game industry. Even though network externalities are recognized as a major driver of new product diffusion, testing the existence and the impact of network externalities at the individual level has been a challenge. By employing online product ratings in the estimation, we find that for online video games: (1) a larger installed base generates higher product ratings by individuals; (2) network externalities exhibit nonlinear dynamics over product life-cycle — non-significant initially, highly significant next, and less significant in the later period; and (3) network externalities differ across consumer segments: the impact of the installed base is stronger on less-experienced consumers than on more-experienced ones. Our results suggest that network externalities should be treated as a dynamic rather than a time-invariant phenomenon, and heterogeneous rather than homogeneous across consumers.
Keywords: Network externalities · Network effects · Online product ratings · User reviews · Video games · Massively Multiplayer Online Role-Playing Games.
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