Market leadership through intergenerational installed base: The case of the U.S. handheld video game industry

The introduction of a new product generation forces incumbents in network industries to rebuild their installed base to maintain an advantage over potential entrants. Using two different datasets on the U.S. market for handheld game consoles, we show that incumbents can to some extent substitute for rebuilding their new installed base by making their new products backward compatible, which lets them draw on the installed base of the parent generation. However, doing this also reduces supply of new software. We examine the tradeoff between technological progress and parent installed base and find that parent installed base matters less if there is a large technological leap between two generations. We then discuss the role of transferring an installed base as a strategy to sustain market leadership.