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Experimental Evidence on Product Adoption in the Presence of Network Externalities

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  • Sujoy Chakravarty

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Abstract

The benefits accruing to a purchaser of a product due to the existing base of consumers of the same or compatible products are known as network externalities. This paper studies Katz and Shapiro's (1986) model of network externalities in an experimental setting. Two sellers choose prices for competing technologies sold to two groups of four buyers purchasing sequentially in two stages. The results are qualitatively consistent with Katz and Shapiro's equilibrium predictions. In certain sessions over three-quarters of first stage buyers purchase the more expensive technology anticipating that later arriving buyers will also buy this technology. In periods where a strong network has been established for a technology in the first stage, over 80 percent of second stage buyers buy that technology, even though in most cases it is priced higher. The data, however, differ from the point predictions of the model. Copyright Kluwer Academic Publishers 2003

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Bibliographic Info

Article provided by Springer in its journal Review of Industrial Organization.

Volume (Year): 23 (2003)
Issue (Month): 3 (December)
Pages: 233-254

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Handle: RePEc:kap:revind:v:23:y:2003:i:3:p:233-254

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Web page: http://www.springerlink.com/link.asp?id=100336

Related research

Keywords: Coordination games; network externalities; technology adoption;

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  1. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
  2. Gary Charness & Matthew Rabin, 2003. "Understanding Social Preferences with Simple Tests," General Economics and Teaching 0303002, EconWPA.
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  9. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1990. "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review, American Economic Association, vol. 80(1), pages 234-48, March.
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  17. Choi, Jay Pil & Thum, Marcel, 1998. "Market structure and the timing of technology adoption with network externalities," European Economic Review, Elsevier, vol. 42(2), pages 225-244, February.
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Cited by:
  1. Christopher Snyder, 2003. "Introduction to the 2003 International Industrial Organization Conference Special Issue," Review of Industrial Organization, Springer, vol. 23(3), pages 175-177, December.
  2. Mak, Vincent & Zwick, Rami, 2010. "Investment decisions and coordination problems in a market with network externalities: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 759-773, December.
  3. Natalie Svarcova & Petr Svarc, 2008. "Technology adoption and herding behavior in complex social networks," Working Papers IES 2008/07, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised May 2008.

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