SW’s profit functions each period depend upon

• The portion of users who have adopted the new system during previous periods, that is, the installed base of users for the new system;
• The portion of users who adopt the new system during the current period, which will depend on the price at which HW chooses to set for new system hardware during the current period; and
• The portion of resources SW chooses to dedicate to the production of new system content during the current period.

Numerical Example

The simulation model of the Hardware-Software Game was used to generate the optimal response for SW to various actions (current user adoption levels) of HW.  The graph below indicates the portion of new systems content that will maximize SW’s current period profits for different sizes of the installed base of new systems users and for different levels of current period adoption.

The model suggests that  SW will maximize profits with a faster pace of new system adoption, that is, by switching a larger portion of resources over to the production of new systems content, when

• The technology system exhibits weaker indirect network effects,
• The degree of content complementarity is greater, and/or
• The installed base of new system users is larger.