Technology adoption in markets with network effects: Theory and experimental evidence

We examine a technology adoption game with network e¤ects in which coordination on technology A and technology B constitute a Nash equilibrium. Coordination on technology B is assumed to be payo¤-dominant. We de…ne a technology’s critical mass as the minimum share of users necessary to make the choice of this technology a best response for any remaining user. We show that the technology with a lower critical mass is risk-dominant and is chosen by the maximin criterion. We present experimental evidence that both payo¤ dominance and risk dominance explain participants’choices. The relative riskiness of a technology can be proxied using technologies’critical masses or stand-alone values. JEL-Classi…cation: C72, C91, D81 Keywords: Network E¤ects, Critical Mass, Coordination, Riskiness. This is a substantially revised and re-titled version of our paper “Technology Adoption in Critical Mass Games: Theory and Experimental Evidence”(DIW DP No. 961). We thank Frank Heinemann, Ganna Pogrebna, Christian Schade, and Georg Weizsäcker, as well as seminar and conference participants at École Polytechnique (Palaiseau), Essen University, Technische Universität Berlin, DIW Berlin, ZEW Mannheim, EEA 2009 (Barcelona), and EARIE 2010 (Istanbul) for helpful comments. We gratefully acknowledge …nancial support by the Volkswagen Foundation for the research project “Innovation and Coordination.” yGeorg-August University Göttingen. E-mail: [email protected]. zCorresponding Author: Heinrich-Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE). E-mail: [email protected]. xHeinrich-Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE). E-mail: [email protected].