Archives
Intrasystem competition and innovation in the international videogame industry
Helmut M Dietl
Chair, Services and Operations Management, Institute for Research in Business Management (IfbF), University of Zurich, Switzerland
Susanne Royer
International Institute of Management, Chair for Business Administration, SME, University of Flensburg, Germany
Abstract
This paper analyses the international videogame industry, focusing on the efficiency and effectiveness of different forms of value chain organization chosen by video console manufacturers. Customer signaling necessities and innovation requirements of the product's system architecture are investigated in this context.
To undertake this analysis, the historical development of the international videogame industry, the competitors in this industry as well as competitive forces within it are first described and evaluated. Indirect network effects characterize competition in the videogame industry. Game developers, publishers and console manufacturers invest in system-specific assets of the product. From a transaction cost perspective it is efficient to minimise the resulting coordination and hold-up problems within a vertically integrated value chain organization.
However, from a strategic perspective selecting an inefficient value chain organization can be advantageous, because in certain markets coordination disadvantages are smaller than the strategic competitive advantages achieved. Competition inside a product system can increase innovation activities inside the system and thus increase the attractiveness of the whole system by leading to better components and thus competitive advantage over other product systems.
Keywords
intra-system competition, innovation, system architecture, value chain organization, indirect networks, competitive advantage, videogame, customer signals
References
Arthur WB (1996) Increasing Returns and the New World Business, Harvard Business Review July-August 1996: 101-109.
Brandenburger AM (1995) The Right Game: Power Play (C): 3DO in 32-bit Videogames, Harvard Business Case Study (9-795-104).
Che Y-K and Hausch D (1999) Cooperative Investments and the Value of Contracting. American Economic Review 89: 125-147.
Dietl HM and Royer S (2003) Indirekte Netzwerkeffekte und Wertschöpfungsorganisation. Eine Untersuchung der zugrundeliegenden Effizienz- und Strategiedeterminanten am Beispiel der Videospielbranche, in Zeitschrift für Betriebswirtschaftslehre (ZfB) 73(4): 407-429.
Farrell J and Gallini NT (1988) Second-sourcing as a commitment: Monopoly incentives to attract competition. Quarterly Journal of Economics November: 673-694.
Farrell J and Saloner G (1986) Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation. The American Economic Review 76 (5): 940-955.
Grossman S and Hart O (1986) The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration. Journal of Political Economy 94: 691-719.
Hart O and Holmström B (1987) The Theory of Contracts, in Bewley TF (eds) Advances in Economic Theory, 5th World Congress of the Econometric Society, Cambridge, Mass, pp.71-155.
Hart O and Moore J (1990) Property Rights and the Nature of the Firm. Journal of Political Economy 98: 1119-1158.
Katz ML and Shapiro C (1985) Network Externalities, Competition and Compatibility. American Economic Review 75: 424-440.
Katz ML and Shapiro C (1994) Systems Competition and Network Effects. Journal of Economic Perspectives 8(2): 93-115.
Klein B, Crawford RG and Alchian AA (1978) Vertical Integration, Appropriable Rents, and the Competitive Contracting Process. Journal of Law and Economics 21: 297-326.
Nöldecke G and Schmidt K (1998) Sequential Investments and Options to Own. Rand Journal of Economics 29: 633-653.
Williamson OE (1985) The Economic Institutions of Capitalism. Firms, Markets, Relational Contracting, New York.
Williamson OE (1996) Transaktionskostenökonomik, in Dietl H, Erlei C, Erlei M and Leschke M (eds) Ökonomische Theorie der Institutionen 2nd edn, Hamburg.
eContent Home