Rolling the dice: Resolving demand uncertainty in markets with partial network effects

Abstract

It is commonly assumed that when markets are characterized by network effects, this universally affects all competing products. In reality, however, firms often have agency in terms of whether to incorporate social features that have the potential to generate network effects. When this is the case, markets are characterized by partial network effects—some products have network effects, whereas others compete on the basis of a standalone value proposition. In this study, we focus on the differences in demand uncertainty between network products and standalone products competing in such a market. We develop theory predicting how a product’s social features interact with other known drivers of demand uncertainty to impact diffusion. We test our arguments in the global board games industry, where board games designed around the collection and trading of “collectible components” compete against traditional board games. Results show that network products exhibit greater variance in diffusion and that their diffusion is disproportionately affected by the degree of product novelty and the intensity and type of competition. Our findings contribute to the literatures on network effects and the diffusion of innovations.