Executive Summary
Researchers disagree about the critical drivers of success in and efficiency of high-tech markets. On the one hand, a few researchers assert that high-tech markets are efficient with best-quality brands dominating. On the other hand, many scholars suspect that network effects lead to perverse markets in which the dominant brands do not have the best quality. The goal of this research is to examine the relative roles of quality and network effects in the success of high-tech products, especially hardware and software products. The authors develop scenarios of how consumers are likely to adopt new products under varying levels of reliance on quality versus a network of users. This analysis suggests that it is not possible to make an a priori case about whether a market is efficient. The outcome is an empirical issue.
The empirical analysis covers 19 categories of software, hardware, and some services between early 1980s and late 1990s. The data are from archival sources. The variables measured are quality, market share, network effects, price, and industry growth rate. Quality ratings for these products are compiled by rating the published reviews of these products in relevant magazines and journals. Based on a typical replacement cycle in these rapidly evolving product categories, the network measure is created by combining the market share of the brands for the past three years. The authors carry out a range of empirical analyses, including graphical analysis of market share flows, logit analysis of switches in market share, hazard analysis of changes in market leadership, and regression analysis of market share flows.
A graphical analysis of market share flows shows that market shares of competing brands are in a constant state of flux, with several cases of new brands coming up and dominating in the markets, primarily on the basis of superior quality. Logit analysis of market share switches shows that the switches in market shares can be significantly explained by switches in quality in current and up to two previous years. Hazard analysis of share leadership also finds that a brand’s hazard of gaining market share over another brand increases in the years immediately after its quality overtakes the other brand. The quality difference also plays an important role in how quickly the new brand may overtake the other brand, while the role of network effects in thwarting this phenomenon is much weaker. Finally, a regression analysis that controls for factors such as price and industry growth rate shows that though both quality and network effects drive market share, in general quality effects are stronger than network effects.
In summary, market share leadership in these product markets changes often, switches in share leadership closely follow switches in quality leadership, and, in general, markets are efficient insofar as the best-quality brands, not the first to enter, dominate the market. Network effects enhance the positive effect of quality rather than negate it.
These results indicate that a rush to market to be the first may not necessarily be a wise strategy, even when network effects are present. Striving to have the best quality in the market pays off in delivering superior market share.
Biography
Gerard J. Tellis (PhD, University of Michigan) is Director of the Center for Global Innovation, Neely Chair of American Enterprise, and Professor of Marketing at the University of Southern California’s Marshall School of Business. He is an expert in innovation, new product growth, market entry, global diffusion, advertising, and pricing. He has published four books and more than 100 articles. His publications have won 15 awards, including four of the most prestigious awards in the field of marketing: the Frank M. Bass, William F. Odell Award, Harold D. Maynard Award (twice), and the Vijay Mahajan Award for lifetime contributions to marketing strategy. Tellis is a trustee of the Marketing Science Institute and a senior research associate and was Visiting Chair of Innovation, Marketing, and Strategy in the Judge Business School at Cambridge University. He has also been a distinguished visitor at Erasmus University, Rotterdam. He is an associate editor of Journal of Marketing Research and is on the editorial review boards of Journal of Marketing and Marketing Science.
Eden Yin is Assistant Professor in Marketing in the Judge Business School and is a fellow of St. Edmund’s College at Cambridge University. He received his PhD from the Marshall Business School at the University of Southern California, Los Angeles. Dr. Yin’s principal research interests are within new product growth in high-tech industries, consumer innovativeness, and internationalization strategies for firms from emerging economies. His work has appeared in Marketing Science and Management International Review, among other outlets.
Rakesh Niraj is Assistant Professor of Marketing in the Marshall School of Business at the University of Southern California, where he teaches classes in Marketing Research and Marketing Models. He received his PhD in Marketing from the Olin School of Business at Washington University in St. Louis. Rakesh’s research interests are in quantitative modeling of marketing phenomena in diverse settings, such as distribution channels, information strategies, customer relationship management, and consumer choice in consumer packaged goods and high-tech products. His work has previously appeared in Journal of Marketing, Management Science, and Marketing Science, among other journals.
J Marketing Research, Volume 46, Number 2, April 2009
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