Does Quality Win? Competing Against an Entrenched Market-Leader in High-Tech Markets

Abstract In recent years, with some early entrants to a market commanding huge market shares, critics have wondered whether the best quality products win in the market place. Early entrants can gain a position of wide-spread acceptance among users. The fact that a critical mass already uses the product might prompt new consumers to snowball onto this early choice leading to consumer lock-in. Many economists fear that such “network effects” may enable inferior products to defend their entrenched positions even against higher quality alternatives. This article tests the validity of this premise in 19 high-tech markets including hardware, software, and services. Results indicate that contrary to the above fear, healthy market evolution occurs in most cases without regulatory intervention. Better quality entrants gain market dominance within three to five years of entry. The findings also show that it makes sense to invest in developing high quality products even if the market seems dominated by an entrenched industry leader and that network effects even increase market efficiency in some cases