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Another strike against the legend of ubiquitous harmful network externalites

The abstract of "Does Quality Win? Network Effects Versus Quality in High-Tech Markets," by Gerald Tellis, Rakesh Niraj, and Eden Yin, forthcoming in the Journal of Marketing Research:

Researchers disagree about the critical drivers of success in and efficiency of high-tech markets. On the one hand, a few researchers assert that high-tech markets are efficient with best quality brands dominating. On the other hand, many authors suspect that network effects lead to perverse markets in which the dominant brands do not have the best quality. We develop scenarios about the relative importance of these effects and the efficiency of markets. Empirical analysis of historical data on 19 categories shows that while both quality and network effects affect market share flows, markets are generally efficient. In particular, market share leadership changes often, switches in share leadership closely follow switches in quality leadership, and the best quality brands, not the first to enter, dominate the market. Network effects enhance the positive effect of quality.

Also, in their reply to comments, the authors write:

Contemporary high-tech markets are marked by two key characteristics: the presence of network effects and a tendency for one brand to dominate with a high market share. Casual observers have inferred causality from these two factors suggesting that network effects lead to high market share. Further, popular anecdotes of supposedly inferior VHS dominating Beta or supposedly inferior QWERTY dominating Dvorak have led others to conclude that network effects lead to perverse markets in which inferior brands dominate superior ones. Some economists have gone on to develop formal models to show how such perverse equilibria happen. In our paper (Tellis, Yin, and Niraj 2009), we provide what we hold is compelling evidence to refute the above conclusion. We find that quality generally wins despite network effects.

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