A hedonic approach to testing for indirect network effects in the LCD television market

Abstract

Using data from CNet's Shopper's.com on prices and television characteristics, we use a quality-adjusted, hedonic price regression to test for the presence of indirect network effects in the television market. In 2009, broadcasters were mandated to cease programme transmission using analog signals, and convert to digital signal transmission, necessitating changes to the reception mechanisms themselves, televisions. Digital signal transmission permits broadcasters to offer greater programming variety, which makes televisions more valuable to consumers. Similarly, the presence of adapters on televisions enables compatibility with a multitude of complementary devices, also increasing consumers' values of televisions. Our results are consistent with the presence of indirect network effects arising from each of these sources.

Keywords:

• business economics
• network effects
• compatibility
• standardization
• retail pricing

JEL Classification:

• L81
• L86
• M21

Acknowledgements

The authors gratefully acknowledge the Net Institute, www.NETinst.org, and the Kauffman Foundation for their generous financial support for this project, and participants at the IAES and NEBS conferences. The usual disclaimer applies.

Notes

¹ This act was officially part of the Deficit Reduction Act of 2005; however, Congress originally set the analog-to-digital transition in motion with the Telecommunications Act of 1996.

² The ATSC set the standard for digital broadcasting and DTV in North America, parts of Central America and South Korea.

³ Televisions not meeting the ATSC tuner standard could still be sold in the United States after this date.

⁴ A direct network effect results in a positive externality since individuals only assess their private benefit when joining a network. However, there is considerable debate about whether indirect network effects lead to externalities. Liebowitz and Margolis (1994, 1995) argue that externalities are not present in the presence of indirect network effects, while recently Church et al. (2008) derived condition under which indirect network effects will lead to an externality. In this article we take the conservative approach and use the notion of an indirect network ‘effect’ instead of ‘externality’.

⁵ Also see Brynjolfsson and Kemerer (1996) for results in the spreadsheet market.