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Networks, Options and Preemptions

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Author Info
Mason, R.
Weeds, H.

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Abstract

This paper examines the irreversible adoption of a technology whose returns are uncertain, when there is an advantage to being the first adopter, but a network advantage to adopting when others also do so. Two patterns of adoption emerge: sequential, in which the leader aggressively preempts its rival; and a more accommodating outcome in which the firms adopt simultaneously. There are two main results. First, conditional on adoption being sequential, the follower adopts at the incorrect point, compared to the co-operative solution. The leader adopts at the co-operative point when there is no preemption, and too early if there is preemption. Secondly, there is insufficient simultaneous adoption in equilibrium. The paper examines the effect of uncertainty, network effects and preemption on these inefficiencies. Standard results do not always hold. Preemption may actually increase the time to first adoption, since simultaneous adoption is more likely to occur in equilibrium with preemption. The analysis also raises the unusual possibility that an increase in uncertainty may cause the first mover to adopt the technology earlier.

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Publisher Info
Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 0013.

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Date of creation: 01 Jan 2000
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Handle: RePEc:stn:sotoec:0013

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Fudenberg, Drew & Gilbert, Richard & Stiglitz, Joseph & Tirole, Jean, 1983. "Preemption, leapfrogging and competition in patent races," European Economic Review, Elsevier, vol. 22(1), pages 3-31, June. [Downloadable!] (restricted)
  2. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
  3. Jay Pil Choi, 1994. "Irreversible Choice of Uncertain Technologies with Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 25(3), pages 382-401, Autumn. [Downloadable!] (restricted)
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  4. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large Fixed Costs," Econometrica, Econometric Society, vol. 56(3), pages 549-69, May. [Downloadable!] (restricted)
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  5. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June. [Downloadable!] (restricted)
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  6. Weeds, Helen, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Blackwell Publishing, vol. 69(3), pages 729-47, July.
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  7. Bergemann, Dirk & Valimaki, Juuso, 1996. "Learning and Strategic Pricing," Econometrica, Econometric Society, vol. 64(5), pages 1125-49, September. [Downloadable!] (restricted)
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  8. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November. [Downloadable!] (restricted)
  9. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
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  10. Fudenberg, Drew & Tirole, Jean, 1985. "Preemption and Rent Equilization in the Adoption of New Technology," Review of Economic Studies, Blackwell Publishing, vol. 52(3), pages 383-401, July. [Downloadable!] (restricted)
  11. Fudenberg, Drew & Tirole, Jean, 1986. "A Theory of Exit in Duopoly," Econometrica, Econometric Society, vol. 54(4), pages 943-60, July. [Downloadable!] (restricted)
  12. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August. [Downloadable!] (restricted)
  13. Hoppe, Heidrun C., 2000. "Second-mover advantages in the strategic adoption of new technology under uncertainty," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 315-338, February. [Downloadable!] (restricted)
  14. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pawlina, G. & Kort, P.M., 2001. "Real options in an asymmetric duopoly: : who benefits from your competitive disadvantage," Discussion Paper 95, Tilburg University, Center for Economic Research. [Downloadable!]
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  2. Flavia Cortelezzi & Giovanni Villani, 2007. "Strategic Technology Adoption and Market Dynamics as Option Games," Quaderni DSEMS 14-2007, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia. [Downloadable!]
  3. Levine, Paul L & Rickman, Neil & Tzavara, Dionisia, 2002. "Market Entry and Roll-out With Product Differentiation," CEPR Discussion Papers 3237, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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