In several product categories, such as electronics, video games, computer hardware and software, and other hi-tech products, backward compatibility feature--the property of a current generation of hardware to allow previous generation of software or accessory to work with it--is an important strategic decision for firms introducing hardware upgrades. We empirically investigate the effect of Microsoft Xbox’s decision to make its new generation console (NGC, Xbox One) backward compatible with selected games for its previous generation console (PGC, Xbox 360) on sales of video games for both PGC and NGC. We assemble a unique dataset using data from a large proprietary game retailer and data scraped from gaming sites during 2013-2017. We analyze the effects using a difference-in-differences approach that includes the use of a synthetic control group. Our results show that when a video game console firm makes its NGC compatible with PGC games, unit sales of PGC games do not change. However, dollar sales of PGC games increase due to a price increase effect. Importantly, sales (units and dollars) of NGC games increase due to a spillover effect, driven primarily by console upgrades. The increases in dollar sales of PGC games result from greater sales of classics, sequels, and first-person shooter genres than sales of non-sequel and other genres of games. Our research offers managerial insights on the backward compatibility feature decision in product upgrades.
(Complete working paper with @Venky Shankar available on request)