Rational Expectations and Information Technology Adoption

The Economics and Information Systems literature on technology adoption often considers network externalities as one of the main factors that affect adoption decisions. The existing work assumes that potential adopters have a certain level of expectations about network externalities when they have to decide whether to adopt a particular technology. However, there has been little discussion on how the potential adopters reach their expectations. This paper attempts to address this issue by offering a new perspective motivated by the rational expectations hypothesis (REH). We show why different firms that initially have heterogeneous expectations about the potential value of an information technology eventually able to arrive at contemporaneous decisions to adopt the same technology, creating the desired network externalities and allowing the firms to become catalysts that facilitate processes that lead to market-wide adoption. We also discuss the conditions under which adoption inertia will take over in the marketplace, as well as the managerial implications of the model.