Will Consumers Be Willing to Pay More When Your Competitors Adopt Your Technology? The Impacts of the Supporting-Firm Base in Markets with Network Effects

Network effects and standards competition introduce significant market uncertainty, creating a substantial challenge to the success of innovating firms. Although the literature has highlighted the importance of establishing a large installed-user base (the number of users adopting the same product) in such markets, the authors draw attention to a different, but potentially important, market force: the supporting-firm base, which they define as the number of firms supporting the same technological standard. They test their proposed hypotheses using data from two markets: the floppy disk drive and personal digital assistant markets. Their results show that (1) consumer product valuation is positively affected not only by the installed-user base but also by the supporting-firm base, (2) the two positive effects interact with each other and the nature of the interaction changes over the evolution of the market (i.e., they strengthen each other's impact in the early stage but weaken each other's impact in the late stage of the product life cycle), and (3) not all supporting firms are equally valuable to the innovator specifically, consumers are affected more by firms exclusively supporting a single standard than by firms supporting multiple standards and by incumbents than by new entrants.