A Simple Inducement Scheme to Overcome Adoption Externalities
AbstractPotential 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 “cut-off strategy” profiles (agents adopt if and only if their type is below a threshold) constitute the set of profiles that can be implemented as a unique equilibrium under an inducement scheme. We derive the ex ante cost of implementing each such profile. Furthermore, we fully characterize the set of inducement schemes that I) implement each such profile and ii) have the following simple form: each scheme specifies a fixed fee that every adopter pays, and a fixed gross subsidy/prize to be randomly allocated to (or evenly split among) the adopters. We discuss the implications of these findings on the design of optimal schemes for different network organizers, namely, private entrepreneurs and public entities.
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Bibliographic InfoPaper provided by Department of Economics, University of Bristol, UK in its series The Centre for Market and Public Organisation with number 03/085.
Length: 17 pages
Date of creation: Jun 2003
Date of revision:
adoption externality; coordination; inducement scheme;
Other versions of this item:
- Park In-Uck, 2004. "A Simple Inducement Scheme to Overcome Adoption Externalities," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 4(1), pages 1-26, June.
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-11-03 (All new papers)
- NEP-MFD-2003-11-03 (Microfinance)
- NEP-NET-2003-11-03 (Network Economics)
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