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The introduction of a new product generation forces incumbents in network industries to rebuild their installed base to maintain an advantage over potential entrants. The authors study if backward compatibility can help moderate this process of rebuilding an installed base. Using a structural model of the US market for handheld game consoles, they show that backward compatibility lets incumbents transfer network effects from the old generation to the new to some extent but that it also reduces supply of new software. They also find that backward compatibility matters most shortly after the introduction of a new generation.
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