Survivor market

Survival in Markets with Network Effects: Product Compatibility and Order-of-Entry Effects 

Published 7/1/2010 

Author: Qi Wang, Yubo Chen, & Jinhong Xie 

Executive Summary
Firms competingin markets with network effects often encounter overwhelmingly high market uncertainty and innovation risk, so survival is a crucial performance concern for new products in these markets. In thisstudy, the authors suggest that a pioneer’s survival (dis)advantage is jointly affected by network effects and two types of product compatibility: cross-generation (compatibility with previous-generationproducts) and within-generation (compatibility with other products in the same generation).
Using data from 45 markets, the authors find systematic patterns of pioneer survival advantage based onthese two types of compatibility. Despite the lower average survival duration of pioneers than their early followers in these markets, the study finds that pioneers can have a survival advantage inmarkets with both strong and weak network effects; however, the two cases require opposite compatibility conditions. Specifically, when the products are cross-generation compatible but within-generationincompatible, a pioneer has a survival disadvantage relative to early followers in markets with very weak network effects; however, a pioneer has a survival advantage in markets with very strong networkeffects. When the products are cross-generation incompatible but within-generation compatible, the results are reversed: A pioneer has a survival advantage in markets with weak network effects but adisadvantage in markets with strong network effects. These findings provide some useful insights into a firm’s entry decision in markets with network effects.
Conventional wisdom emphasizes theimportance of being first in markets influenced by network effects to benefit from a positive installed base. These findings reveal a lower average survival duration of pioneers than their early...