Nintendo Video Game

SloanSchoolofManagement15.013{IndustrialEconomicsforStrategicDecisions 1 Forahistoryofnetworkbattlesinhomevideogameconsoles,startingin1970,goto www.thegameconsole.com. 1 1.First,supposeeachconsumerthinksthatnootherconsumerwillbuyafaxmachine.In thiscase,noconsumerwillwanttobuyafaxmachine,sothateachconsumeris correct inhisorherexpectationregardingthepurchasedecisionsofotherconsumers.We thereforehaveaself-fullledexpectation|eachconsumerhasmadea rational decision nottobuyamachine. 2.Alternatively,supposeeachconsumerbelievesthatmanyotherconsumerswillbuyfax machines.Then,eachconsumerwillwanttobuyafaxmachine,andindeedmany consumerswillbuyone.Wenowhaveaverydierentself-fullledexpectation|many consumershavemadearationaldecisiontobuyafaxmachine,correctlyexpecting thatotherconsumerswilllikewisebuythem. Youhavebeenlookingatthisprobleminthecontextofthe\DOS/MAC"exercise, x a + y a W + " 1 x a x a + y a # L x (1) Taking x asgiven,Firm2chooses y inthesameway.HenceFirm1'sreactionfunctionis givenby: ax a 1 y a ( x a + y a ) 2 ( W L ) 1=0(2) andFirm2'sreactionfunctionisgivenby: ax a y a 1 ( x a + y a ) 2 ( W L ) 1=0(3) 4 ( W L )(4) 2 ThisexampleisfromS.M.BesenandJ.Farrell,\ChoosingHowtoCompete:StrategiesandTacticsin Standardization," JournalofEconomicPerspectives ,Spring1994. 3 pricingstrategies. Figure2a: X  2.2TheLaggard'sDilemma youwillalmostsurelylose,andatgreatexpense. InExercise9,youwillhaveachancetoexplorethe\Laggard'sDilemma,"andseefor yourselfwhatkindsofstrategiesworkanddon'tworkwhenyouarecomingfrombehind. Youwilldothisinthecontextofa\DOS-MAC"simulation,inwhichyouwillfaceApple's situationinthemid-1980's. 3ConnectivityandCompatibility servicefromSprint. 3 example,BarnesandNoble.comhasconnecteddirectlytoCable&Wireless,whileMITis providers B , C ,and D haveexcellentconnectivityamongthemselves.Inthatcase,most ISPsandlargecompanieswouldhaveanincentivetoconnecttooneofthem,becausethat waytheywouldhave60-percentcoverage,andalowerchanceofaconnectivityproblem thaniftheyuseprovider A totippingtowardsoneprogramoranother.Forexample,supposethatthefourprograms havedierentcommandstructures,andthatProgram A adoptadruginthecategoryifalargenumberofotherpatientshavetakenoraretaking adruginthecategory.Inotherwords,doctorsaremorewillingtoprescribe,andpatients totake,atypeofdrugifthattypeofdrughasbeen\accepted,"and\acceptance"isbest measuredbythenumberofotherpeoplethathavetakenorareadruginthattherapeutic category. 4 ThisresearchisdescribedindetailinErnstR.Berndt,RobertS.Pindyck,andPierreAzoulay,\Con- sumptionExternalitiesandDiusioninPharmaceuticalMarkets:AntiulcerDrugs," JournalofIndustrial Economics ,June2003. 15 anddynamicdiusionmodelsareestimatedtoexplaintheevolutionofsalesattheindustry andbrandlevels.Inthesediusionmodels,theadoptionofanydrugwithinthetherapeutic category,andtheadoptionofaparticularbrandofdrugwithinthatcategory,depends Eachequationalsohasoneortwovariablesthatareintendedtoidentifyandmeasurethe inferfromthisthattheimpactofthelevelofpastconsumptionontherateofproduct diusionoccurs primarilyatthebrandlevel . Table2alsoshowsestimatedtotalown-priceandadvertisingelasticities.Theprice elasticitiesareontheorderof{0.6to{0.9,andtheadvertisingelasticitiesareontheorderof1 to1.3.Giventhatthemarginalcostofproductionforantiulcerdrugsisverysmall(generally around10centsto20centsperdailydose),wewouldexpecttheown-priceelasticitiesto becloseto{1iftheproducersareindeedmaximizingprots.Theestimatedown-price elasticitiesareindeedintheballparkof{1.Theadvertisingelasticitiesseemlarge,butmay re ectarisingmarginalcostofadvertising. Figure4:MonthlySalesforH 2 -AntagonistDrugs Figure5:RealPricesofH 2 -AntagonistDrugs 19 Figure6:Quality-AdjustedRealPricesforH 2 -AntagonistDrugs 20 Table1.HedonicPriceEquation A.DependentVariable= P jt B.DependentVariable=log P jt (1)(2)(3)(4)(5)(6) Const.1.35351.41521.39190.51130.54670.5387 (18.82)(18.44)(17.64)(7.47)(7.45)(7.21) GERD it 0.18160.23200.18200.12450.14180.1247 (10.72)(13.48)(10.71)(10.50)(13.40)(10.48) SUMATT it {0.01590.0163{0.0156{0.00610.0050{0.0059 ({0.98)(1.11)({0.97)({0.49)(0.46)({0.48) INTER it {0.0452{0.0375{0.0452{0.0286{0.0259{0.0285 ({16.62)({14.37)({16.59)({14.33)({14.56)({14.29) DOSAGE it {0.1158{0.1194{0.1157{0.1555{0.1566{0.1554 ({6.83)({7.41)({6.83)({9.63)({9.91)({9.64) XS it ( 1).1758  10 3 .1753  10 3 .6030  10 4 .5998  10 4 (5.49)(5.48)(2.72)(2.71) XS t ( 1).4804  10 3 .4265  10 3 .0239  10 3 .3054  10 3 (1.79)(1.50)(1.45)(1.34) R 2 .966.960.967.970.969.970 ZantacPrice$0.01$0.35$0.30$0.04$0.27$0.25 Premium Note :Allregressionsincludeannualandquarterlytimedummies;NOB=441; t -statistics(from Table2.BrandDiusionEquations NOBS=429 (1)(2)(1)(2) PastSalesXS t 3 log[XS t 3 ] C (1.25)({1.76) C Zantac 2.6309{3.1004  P (Tagamet){0.7569{0.8202 (1.46)({1.11)({3.73)({2.76) C Pepcid 4.2109{2.0477  P (Zantac){0.8266{0.9388 (1.46)({0.68)({2.46)({1.84) C Axid 5.1534{3.9436  P (Pepcid){0.6490{0.6770 (1.50)({1.35)({5.38)({4.39) d 0 {0.00240.0612  P (Axid){0.6357{0.6483 ({1.04)(0.13)({6.08)({5.73) d 1 0.01801.3585 (4.04)(4.57) b 0 {26.887{49.474  MIN (Tagamet)1.31041.2794 ({2.41)({3.05)(36.74)(28.45) b 1 {1.0205{1.2366  MIN (Zantac)1.10211.0639 ({1.59)({1.26)(31.48)(21.87) b 2 5.70409.8617  MIN (Pepcid)0.96770.9487 (2.73)(3.25)(38.60)(31.42) b 3 0.21820.1069  MIN (Axid)1.26721.2442 (2.92)(0.87)(39.29)(32.65) R 2 .293.200 Note :Ineachmodel,theconsumptionexternalityisCE t =XS t orlog[XS t ],andCE it =XS it orlog[XS it ].Weestimatethefollowingmodelbynonlinearleastsquares,usingdataforthe fourbrands,combinedtoformanunbalancedpanel: X it X it 3 =[log(^ s  it X  t ) log X it 3 ]
" C i + 12 X k =2  k m kt + d 0 CE t 3 + d 1 CE it 3 # wherelog X  t = b 0 + b 1 log P t + b 2 logPOP t + b 3 logMINSTKTOT t .The^ s  it 'saretted 5AStandardsBattle:High-DenitionDVDs Wediscussedatsomelengththestandardsbattlethatemergednearlythreedecadesago Table3.DVDSalesandrentals$Billions YearVHSDVDHigh-defTotal DVD 1999$12.5$0.8$0.00$13.3 2000$11.8$2.5$0.00$14.3 2001$11.1$6.8$0.00$17.9 2002$9.1$11.6$0.00$20.7 2003$6.1$16.1$0.00$22.2 2004$3.7$21.2$0.00$24.9 2005$1.6$22.8$0.00$24.4 2006$0.4$24.1$0.00$24.5 2007$0.1$23.3$0.27$23.7 2008$0.0$21.6$0.75$22.4 24