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The Role of Critical Mass in Establishing a Successful Network Market: An Experimental Investigation

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Abstract

A network market is a market in which the benefit each consumer derives from a good is an increasing function of the number of consumers who own the same or similar goods. A major obstacle that plagues the introduction of a network good is the ability to reach critical mass, namely, the minimum number of buyers required to render purchase worthwhile. This can be likened to a coordination game with multiple Pareto-ranked equilibria. Through a series of experiments, we study consumers' ability to coordinate on purchasing the network good. Our results highlight the central importance of the level of the critical mass. Neither an improved reward-risk ratio through lower prices nor previous success at a lower critical mass facilitates the establishment of a network market when the critical mass is sufficiently high.

Suggested Citation

  • 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.
  • Handle: RePEc:wlu:lcerpa:0092
    Note: LCERPA Working Paper No. 2015-10
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    Cited by:

    1. Pal, Rupayan & Scrimitore, Marcella, 2016. "Tacit collusion and market concentration under network effects," Economics Letters, Elsevier, vol. 145(C), pages 266-269.
    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.

    More about this item

    Keywords

    experimental economics; network goods; coordination game; critical mass;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • L19 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Other

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