Competition in wearable device market: the effect of network externality and product compatibility

Abstract

The rapid growth in consumer adoption of wearable devices has garnered the attention of both practitioners and academia. Competition in the wearable device market is both substantial and complicated. In this study, we investigate the impact of network externality on wearable device competition in a two-dimensional product differentiation model. We consider a market that has a broad array of products (horizontal differentiation) and various quality levels (vertical differentiation). We study two types of network externalities according to the product compatibility in two types of market structures. Our model indicates that firm profits are decreased by network externalities in horizontal dominance. Network externality also increases (decreases) the higher-quality (lower-quality) firm's profit in vertical dominance. Moreover, firms should ensure that their products are incompatible with those of rivals when network externality is large, and they should release compatible products when network externality is small in horizontal dominance. Firms should always ensure that their products are compatible with those of competitors in vertical dominance.

Analysis of Network Effect in the Competition of Self-Publishing Market

“…This finding might explain why more and more writers are interested in the model of self-publishing. Our finding is consistent with prior literature that the network effect might intensify competition among firms [16], [33]. For example, Foros and Henson reported a similar finding that lower compatibility level can lead to more intense competition between Internet service providers [14].…”

“…First, in the standard market, when both self-publishing platforms choose the incompatibility strategy, their revenue will increase when the network effect intensity is greater than a specific threshold and less than the intensity of location preference. Prior studies on competition of software [9] and wearable devices [33] also reported the importance of the network effect intensity. Our results suggest that the conditions of generating more revenue are not difficult for self-publishing platforms to satisfy.…”

“…In the duopoly setting, introducing the e-book lending option will only benefit the first retailer who offers the program; otherwise, the better-known retailer benefits more. Wu et al analyzed the impact of the network effect in the market competition of wearable devices [33]. They found that firms obtained smaller profits without considering the network effect.…”

“…Providers of digital services such as self-publishing platforms also need to strategically decide their service compatibility in the presence of network externality [33]. Network size depends on a platforms compatibility strategy.…”

Older Adults’ Usability and Emotional Reactions toward Text, Diagram, Image, and Animation Interfaces for Displaying Health Information

“…Wearable devices focus on user communication, providing information in real-time. In certain situations, these devices are superior to handheld devices, such as when tracking vital signs [20,21].…”