The Effect of Superstar Software on Hardware Sales in System Markets

Abstract

Systems are composed of complementary products (e.g., video game systems are composed of the video game console and video games). Prior literature on indirect network effects has argued that in system markets, sales of the primary product (often referred to as “hardware”) largely depend on the availability of complementary products (often referred to as “software”). Mathematical and empirical analyses have almost exclusively operationalized software availability as software quantity. However, though not substantiated with empirical evidence, case illustrations show that certain high-quality, “superstar” software titles (e.g., Super Mario 64) may have disproportionately large effects on hardware unit sales (e.g., Nintendo N64 console sales). In the context of the U.S. home video game console market, the authors show that the introduction of a superstar increases video game console sales by an average of 14% (167,000 units) over a period of five months. One in every five buyers of a superstar software title also purchases the hardware required to use the software. Software type does not consistently alter this effect. The findings imply that scholars who study the relationship between software availability and hardware sales need to account for superstar returns and their decaying effect over time, beyond a mere software quantity effect. Hardware firms should maintain a steady flow of superstar introductions because the positive effect of a superstar lasts only five months and, if need be, make side payments to software firms because superstars dramatically increase hardware sales. Hardware firms’ exclusivity over superstars does not provide an extra boost to their own sales, but it takes away an opportunity for competing systems to increase their sales.