Herd Behaviour in Adoption of Network Technologies

In technology adoption, herd behaviour can lead to a suboptimal outcome as shown, among others, by Choi (1997). However, empirics find little support for the idea that a less efficient technology can conquer the market and lock out a more efficient one. Accordingly, we improve and generalize Choi's results, by introducing an additional source of uncertainty: the economic environment. We investigate how the economic environment can affect herding and consequently the efficiency of the technology choice. The result is a smaller adoption bias. In the limit, firms may optimally experiment with the new technology that turns out to be social welfare improving.