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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:

    1. Vincent Mak & Rami Zwick & Akshay R. Rao & Jake A. Pattaratanakun, 2014. ""Pay What You Want" as Threshold Public Good Provision," Working Papers 201403, Cambridge Judge Business School, University of Cambridge.
    2. Angelou, Georgios N. & Economides, Anastasios A., 2014. "Investment flexibility and competition modeling for broadband business," Telecommunications Policy, Elsevier, vol. 38(5), pages 438-448.
    3. Mak, Vincent & Zwick, Rami & Rao, Akshay R. & Pattaratanakun, Jake A., 2015. "“Pay what you want” as threshold public good provision," Organizational Behavior and Human Decision Processes, Elsevier, vol. 127(C), pages 30-43.
    4. 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.
    5. Arturo Basaure & Varadharajan Sridhar & Heikki Hämmäinen, 2016. "Adoption of dynamic spectrum access technologies: a system dynamics approach," Telecommunication Systems: Modelling, Analysis, Design and Management, Springer, vol. 63(2), pages 169-190, October.

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