Why quality may not always win: Generation life-cycles, quality, and network effects

Economics and Marketing literature have recently witnessed major debates about the critical drivers of success – quality versus network effect, in high-tech markets as well as the efficiency of such markets. Extant research demonstrates that both quality and network effects are significant factors determining market share in these markets, but that quality effect is more important, and that in the presence of network effects such markets are efficient. Based on a new dataset on the US video game industry from 1995 to 2007, we replicate and extend this research in several directions: (1) We replicate and confirm prior results that both quality and network effects are critical drivers of market share; (2) However, network and quality effects vary over the product generation life-cycle, and hence, quality does not win always; (3) In the Growth and Maturity phases of the product generation life-cycle, network effects can trump quality effects; (4) In the presence of network and quality effects, markets can be inefficient. Our results are robust to the many criticisms that have been raised in relation to this research.