Abstract:

Firms selling platform-based products or services in the presence of network effects face a strategic trade-off between platform sales and monetized user engagement. A firm can choose to make its user network compatible with those from other firms, to increase user engagement, at the risk of losing platform market share to firms with smaller networks. I develop a multi-period structural demand model that evaluates the impact of direct network effects on consumer purchase and engagement decisions. These concepts are explored within the context of the video game industry where firms sell hardware platforms (consoles) and tied software (games) to consumers that make both purchase and usage decisions. I utilize individual-level data from one of the most popular online multiplayer games, Fortnite, during the time span when the platform market leader, Sony, enabled network interconnectivity (cross-play) with its direct competitor, Microsoft. Results from the empirical demand model show that direct network effects positively affect both consumer platform purchase utility and engagement. Using demand-side estimates, counterfactual supply simulations determine firm profits as a function of interconnectivity timing.