Coordination and Equilibrium Selection in Games with Positive Network Effects
AbstractWhen 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 InfoPaper provided by Department of Economics, University of Calgary in its series Working Papers with number 2009-14.
Date of creation: 01 Sep 2009
Date of revision: 01 Sep 2009
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