Blockbuster Emergence in Entertainment Platform Markets: Modeling the History of the Video Game Industry in North America.

Abstract

Entertainment markets are typically dominated by blockbusters; which are characterized for being highly popular and financially successful over a vast majority of failures. Today, the entertainment industry has shifted into a platform model, where a similar concentration occurs. The expanding and disruptive placement of multi-sided business organization has modified many cultural markets, reshaping the way products are created, delivered, and consumed. Nevertheless, entertainment platforms still depend heavily on the existence of blockbusters. I study the history of video game industry with particular attention to the life cycle of platforms and blockbuster emergence. After an empirical analysis of the home console market and a literature review of its history, an agent-based model of the video game market is presented. The model aims to represent the complex behavior of the market's heterogeneous actors. The design is based on platform economics, diffusion through social networks, and social influence; with an emphasis in decision making under high uncertainty. Results of the model successfully reproduce the main dynamics of the market in a simple behavioral representation. The simulation experiments indicate that peer influence in a multi-sided organization is sufficient to reproduce the industry's life-cycles, its high concentration, and extreme uncertainty. Furthermore, results of the model display the combined effect of promotion and word of mouth; particularly on how mass promotion provides an increment in expectation while the tipping force of critical mass depends on social influence. Although the model is able to reproduce the emergence of blockbusters and market concentration in a completely uncertain market, the rule-based nature of its structure allows for future experiments that consider installed base factors, quality, or asymmetries in market power. After the initial results of the base model, a series of extensions are presented to address additional issues of blockbuster formation in entertainment platforms. The extensions focus in the role of market segmentation in quality perception, the effect of uncertainty and consumer perception, and finally, an exploration on basic aspects of platform management. These extensions also contribute to support the use of computational models to address theoretical and practical scenarios for the understanding of entertainment platforms. Results for market composition of consumer preferences and product features presents the complex interaction between sub-groups in the formation of positive expectations and market concentration; where partial diversity of games properties is better than its extremes (i.e. fully heterogeneous or identical). Results on consumer perception experiments also provide evidence of a non-linear effect on adoption and market behavior; with higher perception consumers are able to discriminate earlier without the generation of sufficient hype to form blockbusters or platform participation. Finally, the platform management section goes through matters of time of release, multi-homing, and a price structure prototype. In general, results on these extensions present an important effect of externalities among platforms operations (e.g. the mutual hype generation when consumers multi-home or platforms release at closer dates). Future research on entertainment platforms should consider an empirical approach to describe preference and product heterogeneity, which may further inquire in a critical review of quality in markets with high uncertainty. Finally, the insights of the model are useful for the study of other markets beyond the video games or the entertainment business. The insights provided and the model's framework are relevant to any multi-sided system that sees a dominant herd behavior based in decision uncertainty like social media or platforms for collective action.