A1345
Title: Backward compatibility in two-sided markets
Authors: Myongjin Kim - University of Oklahoma (United States) [presenting]
Abstract: Often, new hardware is backwards compatible with software designed for previous-generation hardware. For example, PlayStation 2 can play PlayStation games. A method is developed to study the impact of backward compatibility on hardware and software revenues, adoption rates, and consumer welfare. A dynamic discrete choice demand model is employed for durable goods and incorporates backward compatibility into a framework with heterogeneous forward-looking consumers who can purchase multiple units of hardware. Home video game industry data is used on seven consoles and their games spanning two product generations from 1995 - 2005. Backwards-compatible hardware is found to have a significant advantage over competitors but will cannibalize sales of its predecessor. PlayStation 2 backward compatibility resulted in 1.8 million more PlayStation 2 unit sales, relatively small changes in competitors' sales; 857 thousand fewer unit sales of the original PlayStation, increased average game revenue by \$87,073 for PlayStation and \$278,853 for PlayStation 2; 2.89\% greater consumer welfare. Interestingly, backward compatibility has the greatest effect on non-adopters of the previous generation hardware. Additionally, evidence of strategic behaviour by consumers is found in the presence of backward compatibility: some would-be PlayStation owners forgo purchasing to buy PlayStation 2 instead.
