Software quality and backward compatibility in the video game industry

The video game industry is a platform market in which consumers derive value from a console based on the availability of software. This article examines the role of the quality of software in determining sales of associated hardware. I investigate this using data on the seventh generation of video game consoles (Xbox 360, PlayStation 3, and Wii). Using aggregated review scores from Metacritic, I build a novel measure of accumulated quality for both current-generation and backward compatible software for each console. Using an instrumental variables approach, I estimate the effects of these quality measures on weekly console sales. I find that overall software quality has a significant positive impact on hardware sales, while backward compatible software has a much smaller positive effect. Additionally, I incorporate a reliability measure into the estimation and discuss the console industry in the context of platform markets and durable goods.