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Investment decisions and coordination problems in a market with network externalities: An experimental study

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  • Mak, Vincent
  • Zwick, Rami

Abstract

We study decision-making and the associated coordination problems in an experimental setting with network externalities. Subjects decide simultaneously in every round how much to invest out of a fixed endowment; the gain from an investment increases with total investment, so that an investment is profitable iff total investment exceeds a critical mass. The game has multiple, Pareto-ranked equilibria; we find that whether first-round total investment reaches critical mass predicts convergence towards the Pareto optimal full-investment equilibrium. Moreover, first-round investments and equilibrium convergence vary with critical mass and group size in a complex way that is explicable by subtle effects of strategic uncertainty on decision making.

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  • Mak, Vincent & Zwick, Rami, 2010. "Investment decisions and coordination problems in a market with network externalities: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 759-773, December.
    • Handle: RePEc:eee:jeborg:v:76:y:2010:i:3:p:759-773
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    Cited by:

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    2. Masiliūnas, Aidas, 2017. "Overcoming coordination failure in a critical mass game: Strategic motives and action disclosure," Journal of Economic Behavior & Organization, Elsevier, vol. 139(C), pages 214-251.
    3. Angelou, Georgios N. & Economides, Anastasios A., 2014. "Investment flexibility and competition modeling for broadband business," Telecommunications Policy, Elsevier, vol. 38(5), pages 438-448.
    4. Stefanos Leonardos & Iosif Sakos & Costas Courcoubetis & Georgios Piliouras, 2020. "Catastrophe by Design in Population Games: Destabilizing Wasteful Locked-in Technologies," Papers 2007.12877, arXiv.org.
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    More about this item

    Keywords

    Network externalities Critical mass Coordination Strategic uncertainty Multi-person game Experimental economics;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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