We study consumer decision making in a market with network externalities, in which the utility of a purchase increases with the number of purchasers. While research in this area typically models the consumer as making a binary choice, we propose a new model with continuous individual demand, thus allowing for sensitive gauging of agents' belief towards the product's success. We derive a payoff function that can be implemented experimentally as a voluntary contribution game with non-standard characteristics including: (1) Free-riding is impossible; (2) Contribution is profitable iff total contribution exceeds a critical mass; (3) There are two pure-strategy Nash equilibria, one incurring zero contribution, while the other has full-endowment contribution from all players to achieve Pareto optimality. We collect experimental data for the repeated game, which show that the Pareto-optimal equilibrium is not reached under some conditions. We propose a behavioral theory to interpret the data and conclude that: (1) Behavior is influenced by social and game-theoretic factors; (2) Convergence to the Pareto-optimal equilibrium is more likely than not when the critical mass is less than approximately half of the population's total endowment; (3) The difference between first-round total contribution and the critical mass predicts convergence type and efficiency.
{"title":"Betting on the Trend: An Experimental Study on Network Externalities With Continuous Demand","authors":"Vincent Mak, R. Zwick","doi":"10.2139/ssrn.947688","DOIUrl":"https://doi.org/10.2139/ssrn.947688","url":null,"abstract":"We study consumer decision making in a market with network externalities, in which the utility of a purchase increases with the number of purchasers. While research in this area typically models the consumer as making a binary choice, we propose a new model with continuous individual demand, thus allowing for sensitive gauging of agents' belief towards the product's success. We derive a payoff function that can be implemented experimentally as a voluntary contribution game with non-standard characteristics including: (1) Free-riding is impossible; (2) Contribution is profitable iff total contribution exceeds a critical mass; (3) There are two pure-strategy Nash equilibria, one incurring zero contribution, while the other has full-endowment contribution from all players to achieve Pareto optimality. We collect experimental data for the repeated game, which show that the Pareto-optimal equilibrium is not reached under some conditions. We propose a behavioral theory to interpret the data and conclude that: (1) Behavior is influenced by social and game-theoretic factors; (2) Convergence to the Pareto-optimal equilibrium is more likely than not when the critical mass is less than approximately half of the population's total endowment; (3) The difference between first-round total contribution and the critical mass predicts convergence type and efficiency.","PeriodicalId":413373,"journal":{"name":"Hong Kong University of Science & Technology Business School Research Paper Series","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2006-10-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114300163","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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