The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market June 25, 2012

Duk Bin Jun, KAIST [email protected]

Hyung Soo Lim, KAIST [email protected]

Dong Soo Kim, KAIST Dustin.d.kim@gmail,com

Introduction t

Time

t+1

t+3

Famous Game Release

Information

Purchasing Decision

t+2

Consumer 1

Postpone

Postpone

Consumer 2

Postpone

Purchase

Consumer 3

Postpone

Postpone

Purchase

Postpone

Hyungsoo Lim, The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market

Purchase

June 25, 2012. page 2

Research Overview  Research Issues    

Demand Forecasting Forward-Looking Behavior Indirect Externality Superstar Game

 Research Question  Do consumers show the forward-looking behavior for purchasing video game console?  How announcements of superstar games affect the consumer purchase behavior?  Does indirect externality exist from the games?

 Research Field  Video game console market in Japan  Nintendo DS

Hyungsoo Lim, The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market

June 25, 2012. page 3

Forward-Looking Behavior Present t

Future

t+1

t+2

Purchase Purchase

k Postpone

Purchase Postpone

···

Postpone

Available Information

Expected Valuation depends on state variable Ex) Price, Quality, Superstar game satisfaction level

Hyungsoo Lim, The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market

June 25, 2012. page 4

Related Literatures  Forward-looking behavior  Many former literatures used price as a main driver of the behavior  “A Micromodel of New Product Adoption with Heterogeneous and Forward-looking Consumers: Application to the Digital Camera Category”, (Song and Chintagunta, 2003)  “Intertemporal Price Discrimination with Forward-looking Consumers: Application to the US Market for Console Video-Games”, (Nair, 2007)

 Superstar theory  Definition  Software titles of exceptional quality, which yields a disproportionate payoff, a concept most akin to the superstar concept as originally introduce (Rosen, 1981)

 Indirect Externality  Various former researches incorporate the indirect externality mainly in systematic market, in which hardware and software markets coexist  “Indirect network effects and the product cycle: video games in the U.S., 1994–2002”, (Clements and Ohashi, 2005)  “Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants”, (Nair et al., 2004) Hyungsoo Lim, The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market

June 25, 2012. page 5

Model Process Stage

Contents

Key words

1

Construct state variable structure

Superstar games

2

Construct value function structure

State variable

3

Calculate expected future value function

Contraction mapping

4

Determine purchasing decision

Purchase now vs. Postpone

Hyungsoo Lim, The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market

June 25, 2012. page 6

Model Specification  Stage 1: Construct state variable  Superstar game satisfaction level ( st )

st

 (t  t RD ) it means that unobserved expected satisfaction level

(  RD 1 )

 (t  t RD ) it means that realized satisfaction level (t RD : release date of superstar game )

 Formulate different mean changes for the variable in order to capture heterogeneous stepped change around release date of the superstar games  Latent structure st 1 | st ~ N ( st    I where ItRD i

RD 1 t

 RD 1  I

RD t

 RD  I

RD 1 t

(  RD )

(  RD 1 )

 RD 1 ,  )

1 , t  t RD  i  , i  1, 0,1 0 , elsewhere 

2







t RD -1 t RD t RD 1 Hyungsoo Lim, The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market

time

June 25, 2012. page 7

Model Specification  Stage 2: Construct value function structure  The structure from stage 1 used as a variable  Constant utility function  Consider seasonal effect

W1 ( st ) : The value of " Purchase " at time t with error term 

u

t i

   st   Dt  et i

i



 (1   )

  st   Dt  et ( ut   ) V1 ( st )

 V1 ( st )  et

et ~ logistic distribution

 : discount factor ut : utility of the product

if 1, when December Dt   0, elsewhere

Hyungsoo Lim, The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market

June 25, 2012. page 8

Model Specification  Stage 3: Calculate expected future value function  Dynamic programming  Using contraction mapping method  Numerical approximation

V0 ( st ) : The value of " No purchase " at time t V0 ( st )   E  max V0 ( st 1 ), V1 ( st 1 ) | st 

V0 ( st )    log exp V0  st 1    exp V1  st 1   dP  st 1 | st 

 Stage 4: Determine purchasing decision choice W1t  V1t  et , if W1t  W0t  ' W  V  e  0t 0t t

Purchase

W1t  V1t  et , if W1t  W0t  ' W  V  e  0t 0t t

Postpone

Hyungsoo Lim, The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market

June 25, 2012. page 9

Estimation  MLE estimation  Likelihood function  Likelihood function based on the observed aggregate data (Pakes, 1986) T T  Qt   Likelihood   mst  1   mst Qt   t 1   t 1  Qt : Sales of the product

M

T

 Qt t 1

mst : Predicted market share M : Market potential

 Data & Assumptions  Video game console market in Japan  Nintendo DS

 5 Superstar games  Record over 200 thousand sales at first available week

 Period  2004/11/29 ~ 2007/12/24(66 weeks)

 Homogenous consumers Hyungsoo Lim, The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market

June 25, 2012. page10

Estimation Results  Model performance V1 ( st ) 

 (1   )

  st   Dt

1 , t  t RD  i st 1 | st ~ N ( st    ItRD 1  RD 1  ItRD  RD  ItRD 1  RD 1 ,  2 ) where ItRD i   , i  1, 0,1 0 , elsewhere

Parameters

Estimates

Std.

p-value

Significance

-0.2833

0.0065

0

***

0.0639

0.0096

0

***

0.4865

0.0096

0

***

0.1840

0.1420

0.1951

2.3922

0.0065

0

***

1.1809

0.0093

0

***

1.1285

0.0093

0

***

Log Likelihood

-3626.8714

*** 99% confidence interval

 All parameters are significant except December effect  Most change is occurred at release date  Pre-effect of the stepped change is bigger than post-effect Hyungsoo Lim, The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market

June 25, 2012. page11

Estimation Results  Fitted and actual sales of the Nintendo DS & State variable

Hyungsoo Lim, The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market

June 25, 2012. page12

Conclusion  Video game console consumers tend to have forward-looking behavior depends on superstar games.  Forward-looking behavior depends on announcements of the superstar games explain the sales of video game console  It enables to forecast the demand, although plenty of information is not available

 Around the announcement of the superstar games, satisfaction level of superstar game changed  All parameters related with the state variable show significant result  Among the dates, biggest change is occurred at release date  Pre-effect is bigger than post-effect

 This result shows that existence of the indirect externality and its huge influence

Hyungsoo Lim, The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market

June 25, 2012. page13

End of Documents

Appendix  Likelihood function T T  Qt   L   mst  1   mst Qt   t 1   t 1 

   st   Dt (1   ) exp(V1t  V0t ) ht  1  exp(V1t  V0t )

V1t ( st ) 

  mst    (1  h )  ht   t 

M

T

 Qt t 1

M : Market potential Qt : Sales of the product

 : Discount factor if 1, when December

Dt  

0, elsewhere

Hyungsoo Lim, The Effect of Announcements on Forward-Looking Behaviors for a Handheld Video Game Console Market

June 25, 2012. page15

Appendix  Calculate “no purchase” value function  : Discount factor V0 ( st )   E  max V0 ( st 1 ), V1 ( st 1 ) | st  St  {st , et } E  max W0 ( St 1 ), W1 ( St 1 ) | St    max W0 ( St 1 ), W1 ( St 1 ) dP  St 1 | St      max W0 ( St 1 ), W1 ( St 1 ) dP (et 1 ) dP  st 1 | st    ( p  St 1 | St   p ( st 1 , et 1 | st , et )  p ( st 1 | st )  p  et 1 )   log exp V0  st 1    exp V1  st 1   dP  st 1 | st   V0 ( xt )    log exp V0  st 1    exp V1  st 1   dP  st 1 | st 

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June 25, 2012. page16