Network Effects by Choice: Evidence from the Board Games Industry

It is a long-lasting assumption that network effects are predetermined by market features. However, firms can choose to design for network effects, for example, by implementing social features into their products. Social features enable consumers to create value from social interactions, making consumers a valuable resource outside the boundaries of the firm. On the one hand, social interactions can create a self-perpetuating network effect that causes products to diffuse widely. On the other hand, products that do not succeed in attaining adequate adoption numbers early on in their life cycle will fail to generate network effects and will find themselves locked out of the market. Consequently, designing for network effects raises the stakes, and firms must strategize to maximize their chances for widespread diffusion. When is it beneficial for firms to design for network effects? To answer this question, we develop a demand-side theory on how consumers’ adoption decision differs across products with vs. products without network value. We test our predictions on a sample of more than 19,000 products in the board games industry. We contribute by illustrating how successful product, launch, and competitive strategies for firms trying to induce network effects differ from those that do not.