Key Factor to Drive Success of New Product with Network Effects: Product Quality or Installed Base?

Which is the key factor to drive the success of new product with network effects: product quality or installed base? The answer of this problem extremely influences what strategy the company will adopt. On the basis of the complex networks method, a local network effect model is introduced, in which the utility of the new product valued by each agent includes intrinsic value depending on product quality and network value depending on the popularity of the product in his personal network. The results show that the new product exists for a threshold intrinsic value, which marks two diffusion patterns: diffusion success provided that the intrinsic value is above the threshold intrinsic value, otherwise diffusion failure. The installed base obtained in the launch period is not the key factor of diffusion success. It functions to moderate the threshold intrinsic value to some extent. Furthermore, the strength of the network effects also affects the threshold intrinsic value. These findings have important implications for firms' developing strategies to diffuse new products with network effects.