IDEAS home Printed from https://ideas.repec.org/p/hal/journl/hal-00911829.html
   My bibliography  Save this paper

Investment Decisions and Coordination Problems in a Market with Network Externalities: An Experimental Study

Author

Listed:
  • Vincent Mak

    (CAM - University of Cambridge [UK])

  • Rami Zwick

    (Department of Management and Marketing - UC - University of California)

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.

Suggested Citation

  • Vincent Mak & Rami Zwick, 2010. "Investment Decisions and Coordination Problems in a Market with Network Externalities: An Experimental Study," Post-Print hal-00911829, HAL.
    • Handle: RePEc:hal:journl:hal-00911829
    DOI: 10.1016/j.jebo.2010.08.017
    Note: View the original document on HAL open archive server: https://hal.science/hal-00911829
    as

    Download full text from publisher

    File URL: https://hal.science/hal-00911829/document
    Download Restriction: no
    File URL: https://libkey.io/10.1016/j.jebo.2010.08.017?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, April.
    2. Cooper,Russell, 1999. "Coordination Games," Cambridge Books, Cambridge University Press, number 9780521578967.
    3. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, September.
    4. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1990. "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review, American Economic Association, vol. 80(1), pages 234-248, March.
    5. Sangin Park, 2004. "Quantitative Analysis of Network Externalities in Competing Technologies: The VCR Case," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 937-945, November.
    6. Cooper, Russell, et al, 1990. "Selection Criteria in Coordination Games: Some Experimental Results," American Economic Review, American Economic Association, vol. 80(1), pages 218-233, March.
    7. Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, vol. 99(394), pages 116-131, March.
    8. Russell Cooper & Andrew John, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(3), pages 441-463.
    9. Crawford, Vincent P, 1995. "Adaptive Dynamics in Coordination Games," Econometrica, Econometric Society, vol. 63(1), pages 103-143, January.
    10. Van Zandt, Timothy & Vives, Xavier, 2007. "Monotone equilibria in Bayesian games of strategic complementarities," Journal of Economic Theory, Elsevier, vol. 134(1), pages 339-360, May.
    11. 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 822-841, August.
    12. Rachel Croson & Melanie Marks, 2000. "Step Returns in Threshold Public Goods: A Meta- and Experimental Analysis," Experimental Economics, Springer;Economic Science Association, vol. 2(3), pages 239-259, March.
    13. Broseta, Bruno, 2000. "Adaptive Learning and Equilibrium Selection in Experimental Coordination Games: An ARCH(1) Approach," Games and Economic Behavior, Elsevier, vol. 32(1), pages 25-50, July.
    14. Mark Bagnoli & Barton L. Lipman, 1989. "Provision of Public Goods: Fully Implementing the Core through Private Contributions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(4), pages 583-601.
    15. Erik Brynjolfsson & Chris F. Kemerer, 1996. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Management Science, INFORMS, vol. 42(12), pages 1627-1647, December.
    16. Cadsby, Charles Bram & Maynes, Elizabeth, 1999. "Voluntary provision of threshold public goods with continuous contributions: experimental evidence," Journal of Public Economics, Elsevier, vol. 71(1), pages 53-73, January.
    17. Venkatesh Shankar & Barry L. Bayus, 2003. "Network effects and competition: an empirical analysis of the home video game industry," Strategic Management Journal, Wiley Blackwell, vol. 24(4), pages 375-384, April.
    18. Harikesh Nair & Pradeep Chintagunta & Jean-Pierre Dubé, 2004. "Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants," Quantitative Marketing and Economics (QME), Springer, vol. 2(1), pages 23-58, March.
    19. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, June.
    20. Giovanna Devetag, 2003. "Coordination and Information in Critical Mass Games: An Experimental Study," Experimental Economics, Springer;Economic Science Association, vol. 6(1), pages 53-73, June.
    21. Laura Ferrari Bravo & Paolo Siciliani, 2007. "Exclusionary Pricing And Consumers Harm: The European Commission'S Practice In The Dsl Market," Journal of Competition Law and Economics, Oxford University Press, vol. 3(2), pages 243-279.
    22. John Huyck & Raymond Battalio & Frederick Rankin, 2007. "Evidence on learning in coordination games," Experimental Economics, Springer;Economic Science Association, vol. 10(3), pages 205-220, September.
    23. Erev, Ido & Rapoport, Amnon, 1998. "Coordination, "Magic," and Reinforcement Learning in a Market Entry Game," Games and Economic Behavior, Elsevier, vol. 23(2), pages 146-175, May.
    24. Jeffrey Rohlfs, 1974. "A Theory of Interdependent Demand for a Communications Service," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 16-37, Spring.
    25. R. Isaac & James Walker & Susan Thomas, 1984. "Divergent evidence on free riding: An experimental examination of possible explanations," Public Choice, Springer, vol. 43(2), pages 113-149, January.
    26. Van Huyck, John B. & Cook, Joseph P. & Battalio, Raymond C., 1997. "Adaptive behavior and coordination failure," Journal of Economic Behavior & Organization, Elsevier, vol. 32(4), pages 483-503, April.
    27. Bradley J. Ruffle & Avi Weiss & Amir Etziony, 2010. "Coordination and Critical Mass in a Network Market: An Experimental Investigation," Working Papers 1001, Ben-Gurion University of the Negev, Department of Economics.
    28. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    29. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
    30. H. Leibenstein, 1950. "Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 64(2), pages 183-207.
    31. R. Isaac & David Schmidtz & James Walker, 1989. "The assurance problem in a laboratory market," Public Choice, Springer, vol. 62(3), pages 217-236, September.
    32. Sujoy Chakravarty, 2003. "Experimental Evidence on Product Adoption in the Presence of Network Externalities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(3), pages 233-254, December.
    33. John B. Van Huyck & Raymond C. Battalio & Richard O. Beil, 1991. "Strategic Uncertainty, Equilibrium Selection, and Coordination Failure in Average Opinion Games," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(3), pages 885-910.
    34. Mark Armstrong Author-Email: mark.armstrong@ucl.ac.uk Author-Workplace-Name: University College of London, 2006. "Competition in Two-Sided Markets," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 668-691, Autumn.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    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.
    5. Xiao Han & Yun Yu & Bin Jia & Zi‐You Gao & Rui Jiang & H. Michael Zhang, 2021. "Coordination Behavior in Mode Choice: Laboratory Study of Equilibrium Transformation and Selection," Production and Operations Management, Production and Operations Management Society, vol. 30(10), pages 3635-3656, October.
    6. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jullien, Bruno & Pavan, Alessandro & Rysman, Marc, 2021. "Two-sided Markets, Pricing, and Network Effects," TSE Working Papers 21-1238, Toulouse School of Economics (TSE).
    2. Maoliang Ye & Jie Zheng & Plamen Nikolov & Sam Asher, 2020. "One Step at a Time: Does Gradualism Build Coordination?," Management Science, INFORMS, vol. 66(1), pages 113-129, January.
    3. Francesco Feri & Bernd Irlenbusch & Matthias Sutter, 2010. "Efficiency Gains from Team-Based Coordination—Large-Scale Experimental Evidence," American Economic Review, American Economic Association, vol. 100(4), pages 1892-1912, September.
    4. Weiss, Avi & Etziony, Amir, 2015. "The role of critical mass in establishing a successful network market: An experimental investigationAuthor-Name: Ruffle, Bradley J," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 58(C), pages 101-110.
    5. Xiao Han & Yun Yu & Bin Jia & Zi‐You Gao & Rui Jiang & H. Michael Zhang, 2021. "Coordination Behavior in Mode Choice: Laboratory Study of Equilibrium Transformation and Selection," Production and Operations Management, Production and Operations Management Society, vol. 30(10), pages 3635-3656, October.
    6. Sujoy Chakravarty, 2003. "Experimental Evidence on Product Adoption in the Presence of Network Externalities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(3), pages 233-254, December.
    7. Daniel Birke, 2009. "The Economics Of Networks: A Survey Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 762-793, September.
    8. Bradley J. Ruffle, Avi Weiss, Amir Etziony, 2015. "The Role of Critical Mass in Establishing a Successful Network Market: An Experimental Investigation," LCERPA Working Papers 0092, Laurier Centre for Economic Research and Policy Analysis, revised 12 May 2015.
    9. Giovanna Devetag & Andreas Ortmann, 2007. "When and why? A critical survey on coordination failure in the laboratory," Experimental Economics, Springer;Economic Science Association, vol. 10(3), pages 331-344, September.
    10. Luca Corazzini & Christopher Cotton & Paola Valbonesi, 2013. "Too many charities? Insight from an experiment with multiple public goods and contribution thresholds," "Marco Fanno" Working Papers 0171, Dipartimento di Scienze Economiche "Marco Fanno".
    11. Gunnthorsdottir, Anna & Vragov, Roumen & Seifert, Stefan & McCabe, Kevin, 2010. "Near-efficient equilibria in contribution-based competitive grouping," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 987-994, December.
    12. Yue Liu & Rong Luo, 2023. "Network Effects and Multinetwork Sellers’ Dynamic Pricing in the U.S. Smartphone Market," Management Science, INFORMS, vol. 69(6), pages 3297-3318, June.
    13. Anauati, María Victoria & Feld, Brian & Galiani, Sebastian & Torrens, Gustavo, 2016. "Collective action: Experimental evidence," Games and Economic Behavior, Elsevier, vol. 99(C), pages 36-55.
    14. Corazzini, Luca & Cotton, Christopher & Valbonesi, Paola, 2015. "Donor coordination in project funding: Evidence from a threshold public goods experiment," Journal of Public Economics, Elsevier, vol. 128(C), pages 16-29.
    15. Jean-Pierre H. Dubé & Günter J. Hitsch & Pradeep K. Chintagunta, 2010. "Tipping and Concentration in Markets with Indirect Network Effects," Marketing Science, INFORMS, vol. 29(2), pages 216-249, 03-04.
    16. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    17. Ennis, Huberto M. & Keister, Todd, 2005. "Government policy and the probability of coordination failures," European Economic Review, Elsevier, vol. 49(4), pages 939-973, May.
    18. Haruvy, Ernan & Stahl, Dale O., 2007. "Equilibrium selection and bounded rationality in symmetric normal-form games," Journal of Economic Behavior & Organization, Elsevier, vol. 62(1), pages 98-119, January.
    19. Keser, Claudia & Suleymanova, Irina & Wey, Christian, 2012. "Technology adoption in markets with network effects: Theory and experimental evidence," Information Economics and Policy, Elsevier, vol. 24(3), pages 262-276.
    20. Zhang, Yang & Du, Xiaomin, 2017. "Network effects on strategic interactions: A laboratory approach," Journal of Economic Behavior & Organization, Elsevier, vol. 143(C), pages 133-146.

    More about this item

    Keywords

    Network externalities; critical mass; coordination; strategic uncertainty; multi-person game; experimental economics; C72; C92; D62;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:hal-00911829. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.