Title: Quality choice of a new product development and network externality

Authors: Bonwoo Koo, Dong Eui Chang

Addresses: Department of Management Sciences, University of Waterloo, 200 University Ave. West, Waterloo Ontario N2L 3G1, Canada. ' Department of Management Sciences, University of Waterloo, 200 University Ave. West, Waterloo Ontario N2L 3G1, Canada

Abstract: In a framework of hardware–software paradigm with network externality, this study analyses the resource allocation problem of a hardware firm, which is developing a new hardware system. By formulating a dynamic model of quality choice, this study shows that firm|s long-run profit is sensitive to the network effect, especially to the provision of software varieties at the initial stage of development. The insights from this study can be applicable to the investment decision and resource allocation problems in rapidly developing network industries such as video console market or computer technology.

Keywords: indirect network effect; resource allocation; dynamic optimisation; chicken-and-egg paradox; complementary products; new product development; NPD; network externality; dynamic modelling; quality choice; video consoles; computer technology.

DOI: 10.1504/IJMNE.2009.032833

International Journal of Management and Network Economics, 2009 Vol.1 No.4, pp.394 - 405

Published online: 25 Apr 2010 *

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