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

Vincent Mak (1) , Rami Zwick (2)

1 CAM - University of Cambridge [UK]
2 Department of Management and Marketing

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.

Mots clés: Network externalities; critical mass; coordination; strategic uncertainty; multi-person game; experimental economics; C72; C92; D62

Domaines: Économie et finance quantitative [q-fin]

Vincent Mak, Rami Zwick. Investment Decisions and Coordination Problems in a Market with Network Externalities: An Experimental Study. Journal of Economic Behavior and Organization, 2010, 76 (3), pp.759. ⟨10.1016/j.jebo.2010.08.017⟩. ⟨hal-00911829⟩