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The Impact of Digital Conversion Technology on Flash Memory Market Competition

This empirical analysis examines the lack of standards convergence in the flash memory card market and explores the impact of network effects and conversion technology on market concentration and price variation.

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The Impact of Digital Conversion Technology on Flash Memory Market Competition

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  1. “Winners Take Some”Standards Competition in the Presence of Digital Conversion Technology - An Empirical Analysis of the Flash Memory Market Charles Z. Liu, University of Pittsburgh Chris F. Kemerer, University of Pittsburgh Michael D. Smith, Carnegie Mellon University

  2. IT Standards Competition • Classic “Winner-Takes-All” markets: • VHS vs. Betamax VCR standards war 1987 - VHS has nearly 100% of the market 1979 – nearly equal market shares • Operating Systems: Windows vs. OS/2 • DVD Adoption: DVD vs. Divx • Blu-Ray vs. HD DVD

  3. But, some recent counter examples: Digital media formats: WMV, RM, QuickTime, etc… Digital photography: JPEG, GIF, TIFF, PNG etc. Flash Memory Cards: • Compact Flash (CF) • SmartMedia (SM) • Secure Digital (SD) • Memory Stick (MS) • Multimedia Card (MMC) • xD Picture • Flash memory revenue is expected to reach $18.7 billion in 2010, up from a record $10.6 billion in 2005 (IDC 2006). 3

  4. Flash Memory Cards Market Share: 01/2003 to 08/2006 Flash Memory: No Winner-Takes-All Result

  5. Empirical Study – Research Questions What drives the lack of standards convergence in the flash memory card market? Network Effects? Conversion Technology? • Impact on Network Effects? • Impact on Different Standards? • Impact on Market Concentration? 5

  6. Prior Literature Network Effects Price Premium (Hedonic Price Regression) (Greenstein, 1993, Gandal 1994, 1995, Brynjolfsson & Kemerer 1996) Conversion Technology Higher product price (Matutes & Regibeau, 1988, Economides, 1989, Farrell, 1992) Longer period of co-existence (Choi 1996, 1997) Reduced first-mover advantage (Liu et al. 2007) 6

  7. Capacity, Speed, Format, Brand H1 (+) Network Effects (Installed Base) Price Premium H3 (–) H2 (+) Digital Conversion Adoption Market Concentration H4 (–) Price Variation Research Model

  8. Data – Flash memory market • Time Frame: Jan 2003~ Aug 2006 • Data (multiple sources) • NPD Group - POS data collected from retail stores: • Flash memory cards and converters: monthly price, units sold, capacity, brand, at the product model level • Product attributes data from Amazon.com by an automatic software agent • Specifications data collected from manufacturers' websites and corresponding flash memory standard associations • Sample Size: 15,091 (consists of 706 products across 44 months)

  9. Econometric Model – Model 1 • Econometric Issues: • Multicollinearity • Heteroskedasticity • Panel specific autocorrelation • Endogeneity • Solutions: • Centering interacting variables • GLS adjustments • 2SLS

  10. Results – Model 1 † N=15,091, 6 Formats, 45 brands, 12 sizes, 706 panels across 44 months. ♀ Standard errors in parentheses. *: p<5%; **: p<1%.

  11. Results – Marginal Effects • H3 is supported • Coefficient α3 is highly significant (p<0.001) • An F test between the restricted model (the model without the interaction term) and the unrestricted model is also significant.

  12. Interaction Plot 1 Flash Memory Card Price Premium 30 Leading Format 20 10 Average Format 0 -10 Minority Format Converter Adoption Level -20 Figure: Flash Memory Card Price Premium at Different Converter Adoption Levels

  13. Interaction Plot 2 Flash Memory Card Price Premium 30 Low Converter Adoption Level Average Converter Adoption Level 20 10 0 High Converter Adoption Level -10 Flash Memory Install Base -20 Figure: Flash Memory Card Price Premium at Different Installed Base Levels

  14. Econometric Model 2 (Hypothesis 4) • Market concentration: Herfindahl-Hirschman Index (HHI) • Results H4 is supported

  15. Implications • Consumers: Converters and digital media alleviate consumer dilemma when making a technology choice. • Firms: Pricing strategies • Market: Intensified competition • Society: An alternative mechanism to foster technology adoption.

  16. Questions……

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