Does Quality Win? Network Effects Versus Quality in High-Tech Markets

Researchers disagree about the critical drivers of success in and efficiency of high-tech markets. On the one hand, some researchers assert that high-tech markets are efficient with best-quality brands being dominant. On the other hand, many scholars suspect that network effects lead to perverse markets in which the dominant brands do not have the best quality. The authors develop scenarios about the relative importance of these effects and the efficiency of markets. Empirical analysis of historical data on 19 categories shows that though both quality and network effects affect market share flows, in general markets are efficient. In particular, market share leadership changes often, switches in share leadership closely follow switches in quality leadership, and the best-quality brands, not the ones that are first to enter, dominate the market. Network effects enhance the positive effect of quality.