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A Simple Inducement Scheme to Overcome Adoption Externalities

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  • In-Uck Park

Abstract

Potential 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.

Suggested Citation

  • In-Uck Park, 2003. "A Simple Inducement Scheme to Overcome Adoption Externalities," The Centre for Market and Public Organisation 03/085, The Centre for Market and Public Organisation, University of Bristol, UK.
    • Handle: RePEc:bri:cmpowp:03/085
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    File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp85.pdf
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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.
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    3. Leslie M. Marx & Steven A. Matthews, 2000. "Dynamic Voluntary Contribution to a Public Project," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(2), pages 327-358.
    4. Mark Bagnoli & Barton L. Lipman, 1989. "Provision of Public Goods: Fully Implementing the Core through Private Contributions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(4), pages 583-601.
    5. Gale, Douglas, 1995. "Dynamic Coordination Games," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(1), pages 1-18, January.
    6. 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 581-597, June.
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    Cited by:

    1. Jack Ochs, 2006. "Dynamic Network Formation," Working Paper 233, Department of Economics, University of Pittsburgh, revised Jan 2006.
    2. 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.
    3. Aoyagi, Masaki, 2018. "Bertrand competition under network externalities," Journal of Economic Theory, Elsevier, vol. 178(C), pages 517-550.
    4. Shichijo, Tatsuhiro & Fukuda, Emiko, 2021. "Cost-sharing mechanism for excludable goods with generalized non-rivalry," Journal of Economic Theory, Elsevier, vol. 193(C).
    5. Aoyagi, Masaki, 2013. "Coordinating adoption decisions under externalities and incomplete information," Games and Economic Behavior, Elsevier, vol. 77(1), pages 77-89.
    6. Shichijo Tatsuhiro & Nakayama Yuji, 2009. "A Two-Step Subsidy Scheme to Overcome Network Externalities in a Dynamic Game," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-20, February.
    7. Masaki Aoyagi, 2010. "Monopoly Sale of a Network Good," ISER Discussion Paper 0794, Institute of Social and Economic Research, Osaka University.
    8. In-Uck Park, 2004. "Dynamic Formation of Network with Adoption Externalities," Econometric Society 2004 Far Eastern Meetings 662, Econometric Society.

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    More about this item

    Keywords

    adoption externality; coordination; inducement scheme;
    All these keywords.

    JEL classification:

    • 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

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