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A Simple Inducement Scheme to Overcome Adoption Externalities

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  • Park In-Uck

    ()
    (University of Pittsburgh)

Abstract

Customers of network commodities face coordination problems due to adoption externalities that give rise to multiple, Pareto-ranked equilibria. We investigate the extent to which the coordination problem can be resolved by inducement schemes when agents' preferences are private information. Specifically, we show that all symmetric ``cutoff strategy'' profiles constitute the set of profiles uniquely implementable under an inducement scheme. We derive the ex ante cost of implementing each such profile and characterize simple inducement schemes of the following form that implement it: each scheme specifies a fixed fee that every adopter pays, and a fixed gross subsidy/prize to be randomly allocated to the adopters. We discuss the implications of these findings on the design of optimal schemes for different network organizers. We extend the analysis to preference revelation mechanisms and prove a revenue equivalence result and characterize optimal mechanisms, but find that unique implementation is no longer possible.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 4 (2004)
Issue (Month): 1 (June)
Pages: 1-26

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Handle: RePEc:bpj:bejtec:v:contributions.4:y:2004:i:1:n:3

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  1. Dybvig, Philip H. & Spatt, Chester S., 1983. "Adoption externalities as public goods," Journal of Public Economics, Elsevier, vol. 20(2), pages 231-247, March.
  2. Marx, Leslie M & Matthews, Steven A, 2000. "Dynamic Voluntary Contribution to a Public Project," Review of Economic Studies, Wiley Blackwell, vol. 67(2), pages 327-58, April.
  3. Bagnoli, Mark & Lipman, Barton L, 1989. "Provision of Public Goods: Fully Implementing the Core through Private Contributions," Review of Economic Studies, Wiley Blackwell, vol. 56(4), pages 583-601, October.
  4. Gale, D., 1992. "Dynamic Coordiantion Games," Papers 13, Boston University - Department of Economics.
  5. Gradstein, Mark, 1992. "Time Dynamics and Incomplete Information in the Private Provision of Public Goods," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 581-97, June.
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Cited by:
  1. Ochs, Jack & Park, In-Uck, 2010. "Overcoming the coordination problem: Dynamic formation of networks," Journal of Economic Theory, Elsevier, vol. 145(2), pages 689-720, March.
  2. Aoyagi, Masaki, 2013. "Coordinating adoption decisions under externalities and incomplete information," Games and Economic Behavior, Elsevier, vol. 77(1), pages 77-89.
  3. Jack Ochs, 2006. "Dynamic Network Formation," Working Papers 233, University of Pittsburgh, Department of Economics, revised Jan 2006.
  4. In-Uck Park, 2004. "Dynamic Formation of Network with Adoption Externalities," Econometric Society 2004 Far Eastern Meetings 662, Econometric Society.
  5. Masaki Aoyagi, 2010. "Monopoly Sale of a Network Good," ISER Discussion Paper 0794, Institute of Social and Economic Research, Osaka University.

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