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A Simple Inducement Scheme to Overcome Adoption Externalities

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  • Park In-Uck

    (University of Pittsburgh, i.park@bristol.ac.uk)

Abstract

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 ``cutoff strategy'' profiles constitute the set of profiles uniquely implementable under an inducement scheme. We derive the ex ante cost of implementing each such profile and characterize simple inducement schemes of the following form that implement it: each scheme specifies a fixed fee that every adopter pays, and a fixed gross subsidy/prize to be randomly allocated to the adopters. We discuss the implications of these findings on the design of optimal schemes for different network organizers. We extend the analysis to preference revelation mechanisms and prove a revenue equivalence result and characterize optimal mechanisms, but find that unique implementation is no longer possible.

Suggested Citation

  • 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.
    • Handle: RePEc:bpj:bejtec:v:contributions.4:y:2004:i:1:n:3
    DOI: 10.2202/1534-5971.1103
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    References listed on IDEAS

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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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    6. Gale, Douglas, 1995. "Dynamic Coordination Games," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(1), pages 1-18, January.
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    Citations

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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. Aoyagi, Masaki, 2013. "Coordinating adoption decisions under externalities and incomplete information," Games and Economic Behavior, Elsevier, vol. 77(1), pages 77-89.
    5. 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.
    6. Shichijo, Tatsuhiro & Fukuda, Emiko, 2021. "Cost-sharing mechanism for excludable goods with generalized non-rivalry," Journal of Economic Theory, Elsevier, vol. 193(C).
    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; revenue equivalence; optimal mechanism;
    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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