Investment decisions and coordination problems in a market with network externalities: An experimental study |
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| Institution: | 1. Department of Psychology, University of Basel, Missionsstrasse 62A, 4055 Basel, Switzerland;2. Cognitive Science Program, Indiana University, 1101 E. 10th Street, Bloomington, IN 47405, USA;3. Department of Research Methodology, Measurement and Data-Analysis, University of Twente, Drienerlolaan 5, 7522 NB Enschede, The Netherlands;4. Department of Psychiatry, Virginia Commonwealth University, 1200 East Broad Street, Richmond, VA 23298-0710, USA;5. Department of Human Genetics, Virginia Commonwealth University, 1101 East Marshall Street, Richmond, VA 23298-0033, USA;6. Department of Psychology, Division of Molecular Neuroscience, University of Basel, Birmannsgasse 8, 4055 Basel, Switzerland |
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| 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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