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Winning While Losing: Competition Dynamics in the Presence of Indirect Network Effects

What determines competition dynamics in markets with indirect network effects? We analyze this question in a dynamic hardware-software framework, where software firms compete in quality upgrades. We identify market structure as a major determinant of competition dynamics. Indirect network effects tie together the performance of firms on the same platform: A successful competitor raises the value of all firms on the same platform, where an unsuccessful firm may enjoy a windfall increase in its market value. In contrast to the tipping result in the literature, we find tendencies towards increasing competition across platforms for a wide range of market structures.