Intra-system competition and innovation in the international videogame industry

Summary

This paper analyses the international videogame industry, focusing on the efficiency and effectiveness of different forms of value chain organization chosen by video console manufacturers. Customer signalling necessities and innovation requirements of the product’s system architecture are investigated in this context. To undertake this analysis, the historical development of the international videogame industry, the competitors in this industry as well as competitive forces within it are first described and evaluated. Indirect network effects characterize competition in the videogame industry. Game developers, publishers and console manufacturers invest in system-specific assets of the product. From a transaction cost perspective it is efficient to minimise the resulting coordination and hold-up problems within a vertically integrated value chain organization. However, from a strategic perspective selecting an inefficient value chain organization can be advantageous, because in certain markets coordination disadvantages are smaller than the strategic competitive advantages achieved. Competition inside a product system can increase innovation activities inside the system and thus increase the attractiveness of the whole system by leading to better components and thus competitive advantage over other product systems.

Key Words:

• intra-system competition
• innovation
• system architecture
• value chain organization
• indirect networks
• competitive advantage
• videogame
• customer signals