Nintendo Case Study

1510 Words7 Pages
2. Briefly, what are the network effects in the video game industry? In the case of the video game industry the indirect network effects exist in that the demand for the proprietary video game system (hardware) is dependent on the demand for the complementary good, the video game cartridge (software). In this industry, the demand for the proprietary gaming system and the video game software are inseparable; for example, Nintendo creates video games with “lock-out” security chips to prevent unauthorized game cartridges from being played on Nintendo hardware, and its competitor, Sega, does the same. Thus, if a user wishes to purchase the Nintendo game cartridges (software), he/she will have to purchase the Nintendo hardware. The incompatibility across competing hardware systems and video game software creates and sustains this network effect. The video game industry is also an example of a two-sided market in that the console producer acts as an intermediary between consumers and video game developers. As such, consumer demand depends on video game developers providing a variety of games, and video game developers desire a large user base for which to produce and sell games (without users, producing the game is useless). The industry also has positive network effects in that as the console user base increases, so does the number of video game cartridges sold. 3. Describe + evaluate Nintendo’s strategy in each of the following areas. Why did Nintendo take the actions it did? How did these affect the value created by the industry? How did they affect the portion of value Nintendo was able to capture? Across all categories, Nintendo employed strategies that allowed it to vastly increase their portion of the video game industry by capturing the value added by complementors, suppliers, and buyers. In doing so, Nintendo successfully increased the total value
Open Document