A hedonic study of network effects in the market for word processing software Sujoy Chakravarty a, * , Kutsal Dogan a, * , Nels Tomlinson b a School of Management, University of Texas at Dallas, 2601 N. Floyd Road, SM 33, Richardson, TX 7508, USA b Alaska Department of Labor and Workforce Development, Research and Analysis Section, Juneau, AK 99802, USA Available online 17 May 2005 Abstract We investigate the effects of various quality attributes and network-specific features on the price of word processing software using a hedonic price framework in order to assess the effect of the network variable on the quality-adjusted price. We find a positive effect of network externalities on price in this market that is similar to markets for spreadsheet and web server software as shown previously (Brynjolfsson and Kemerer [E. Brynjolfsson, and C. Kemerer Network externalities in microcomputer software: an econometric analysis of the spreadsheet market, unpublished draft, MIT Sloan School of Management, (1997)]; Gallaugher and Wang [J.M. Gallaugher and Y. Wang, Understanding network effect in software markets: evidence from web server pricing, MIS Quarterly 26 (4), (Dec. 2002), 303–327]; Gandal [N. Gandal, Hedonic price indexes for spreadsheets and an empirical test for network externalities, Rand Journal of Economics 25 (1) (Spring 1994)]). As observed in other software pricing studies, we find strong brand effects among word processors. However, quality attributes do not significantly impact price in this market. This is contrary to the evidence from studies of spreadsheet software. Furthermore, in contrast to the evidence from spreadsheets, prices adjusted for quality show an upward trend over time in the market for word processing software. D 2005 Elsevier B.V. All rights reserved. Keywords: Network externalities; Software pricing; Monopoly power; Hedonic regression 1. Introduction This paper examines the effect of an installed base of consumers on the pricing of DOS word processing software. These network effects are measured by using a hedonic pricing framework, which regresses product price on several product attributes, one of which is the installed base. Network externalities 1 0167-9236/$ - see front matter D 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.dss.2004.10.010 * Corresponding authors. E-mail addresses: sujoy@utdallas.edu (S. Chakravarty)8 kutsal.dogan@utdallas.edu (K. Dogan). 1 The phrase bNetwork ExternalityQ is used rather loosely in the Industrial Organization literature. In economics, an externality occurs when there is an unpaid benefit or cost that an agent has to bear. Externalities if not internalized may lead to an inefficient outcome, i.e., a market failure [30]. Not all network externalities are examples of inefficient outcomes. In this sense, referring to it as a bnetwork effectQ may be more precise. Decision Support Systems 41 (2006) 747 – 763 www.elsevier.com/locate/dsw