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Investment decisions and coordination problems in a market with network externalities: An experimental study

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  • Mak, Vincent
  • Zwick, Rami

Abstract

We study decision-making and the associated coordination problems in an experimental setting with network externalities. Subjects decide simultaneously in every round how much to invest out of a fixed endowment; the gain from an investment increases with total investment, so that an investment is profitable iff total investment exceeds a critical mass. The game has multiple, Pareto-ranked equilibria; we find that whether first-round total investment reaches critical mass predicts convergence towards the Pareto optimal full-investment equilibrium. Moreover, first-round investments and equilibrium convergence vary with critical mass and group size in a complex way that is explicable by subtle effects of strategic uncertainty on decision making.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 76 (2010)
Issue (Month): 3 (December)
Pages: 759-773

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Handle: RePEc:eee:jeborg:v:76:y:2010:i:3:p:759-773

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Web page: http://www.elsevier.com/locate/jebo

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Keywords: Network externalities Critical mass Coordination Strategic uncertainty Multi-person game Experimental economics;

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