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

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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.

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Source: The NDP group; the data are available from https://www.npd.com/

Fig. 5

Source: Google Trends; the data are available from https://www.google.com/trends/

Fig. 6

Similar content being viewed by others

Notes

  1. The information was accessed on 2014/10/11 at https://technology.ihs.com.

  2. The statistics were accessed on 2014/02/19 at http://tech.hexun.com/2013-04-19/153346302.html.

  3. The scale of market size is converted from RMB to US dollars. The foreign exchange rate is about 1RMB = 0.1545 Dollars at the day of 12/22/2015.

  4. The statistics were accessed on 2014/02/19 at http://www.iimedia.cn.

  5. The information can be accessed at http://venturebeat.com/2013/11/06/how-jawbone-is-using-big-data-to-lead-the-personal-fitness-wearable-industry/.

  6. Proofs of all propositions are provided in Supplementary Material Appendix 1.

  7. The proofs of corollaries are provided in Supplementary Material Appendix 2.

  8. According to Google Trends website, the hot degree represents “search interest relative to the highest point on the chart. The detail explanations of hot degree and related concepts can be seen at https://support.google.com/trends/answer/4355164?hl=en&rd=1.

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Acknowledgments

The authors are grateful to the editor, associate editor and the two anonymous reviewers for their valuable comments and suggestions throughout the review process. The authors would also like to thank the participants at the 18th Pacific Asia Conference on Information Systems for their valuable feedback.

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Authors and Affiliations

  1. Southwestern University of Finance and Economics, Chengdu, Sichuan, China

    Jing Wu & Haichao Zheng

  2. University of Memphis, Memphis, TN, 38152, USA

    He Li

  3. Texas Tech University, Lubbock, TX, 79409, USA

    Zhangxi Lin

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  1. Jing Wu
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Correspondence to Jing Wu.

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Wu, J., Li, H., Lin, Z. et al. Competition in wearable device market: the effect of network externality and product compatibility. Electron Commer Res 17, 335–359 (2017). https://doi.org/10.1007/s10660-016-9227-6

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