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Coordination and Equilibrium Selection in Games with Positive Network Effects

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Author Info

  • Alexander M. Jakobsen
  • B. Curtis Eaton

    (University of Calgary)

  • David Krause

Abstract

When agents make their choices simultaneously, network effects often give rise to a selection problem involving perfectly coordinated, Pareto-optimal equilibria. We characterize this selection problem, and introduce a generalized sequential choice model to address it. In this model, we show how expectation formation under imperfect information combines with network effects to form coordination cascades: ordered partitions of the agent space wherein coordination on one alternative is eventually optimal for all agents. Several theorems are proven regarding both the likelihood and extent of coordination under various parameter changes; in particular, we show that the degree to which agents can observe the choices of others is an important consideration. We also present numerical calculations which shed additional light on the coordination problem, and which suggest that sequential choice resolves, with high probability, the equilibrium selection problem efficiently.

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Bibliographic Info

Paper provided by Department of Economics, University of Calgary in its series Working Papers with number 2009-14.

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Date of creation: 11 Oct 2013
Date of revision: 11 Oct 2013
Handle: RePEc:clg:wpaper:2009-14

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  1. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
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  6. Choi, J.P., 1994. "Herd behavior, the "Penguin effect", and the suppression of informational diffusion: An analysis of informational externalities and payoff interdependency," Discussion Paper 1994-62, Tilburg University, Center for Economic Research.
  7. Curtis R. Taylor & Thomas D. Jeitschko, 2001. "Local Discouragement and Global Collapse: A Theory of Coordination Avalanches," American Economic Review, American Economic Association, vol. 91(1), pages 208-224, March.
  8. Jeffrey Rohlfs, 1974. "A Theory of Interdependent Demand for a Communications Service," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 16-37, Spring.
  9. Church, Jeffrey & Gandal, Neil, 1992. "Network Effects, Software Provision, and Standardization," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 85-103, March.
  10. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
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