Strategic Responses to Innovation Shocks: Evidence from the Video Game Industry

The strategy and innovation literatures emphasize that incumbent firms often fail to respond to shocks, yet also point out that some firms can survive by repositioning. The Comparative Adjustment, Transaction and Opportunity Cost (CATO) framework addresses this critical issue by predicting which firms will and will not reposition in response to a shock, when, and to which positions. This paper applies the CATO framework to predict which complementors in the videogame industry repositioned in response to the introduction of the Sony PS2 console, a major innovation shock, and with which strategy. We find that proxies for comparative adjustment and opportunity costs successfully predict complementors’ homing strategies in response to the shock: i.e., the choice of whether to develop games for a single console, multiple consoles sequentially, or multiple consoles simultaneously.