This paper examines the importance of indirect network effects in the
U.S. video game market between 1994 and 2002. The diffusion of game
systems is analyzed by the interaction between console adoption
decisions and software supply decisions. Estimation results suggest that
introductory pricing is an effective practice at the beginning of the
product cycle, and expanding software variety becomes more effective
later. The paper also finds a degree of inertia in the software market
that does not exist in the hardware market. This observation implies
that software providers continue to exploit the installed base of
hardware users after hardware demand has slowed