Strategic Adoption in a Two-Sided Market: A Study of College Applications in Brazil∗

This paper measures the importance of indirect network effects in the adoption by colleges and students of ENEM, a standardized exam for high-school students in Brazil that can be used in college application processes. We estimate network effects and find that they are economically significant. Students are more likely to take ENEM the larger the number of colleges adopting it. Similarly, colleges are more likely to adopt it the larger the number of students taking the exam. Moreover, we find evidence that colleges play strategically and that heterogeneity determines their decisions. A college is less likely to adopt ENEM the larger the number of competitors adopting it. Colleges’ characteristics such as ownership and organization affect adoption decisions. In a counterfactual exercise we compare colleges’ adoption decisions under competition and under joint colleges’ payoffs maximization. Adoption rates are significantly reduced when colleges internalize the competitive effect, i.e., the effect of their decisions on other colleges’ payoffs. On the other hand, they increase when indirect network effects the effect of students’ response to their decisions on other colleges’ payoffs are also internalized. Competitive adoption rates are found to exceed joint optimum rates by a small difference. These results suggest that, without considering students’ welfare, adoption rates are excessive, but close to the joint optimum. ∗I thank Ali Hortaçsu and Chad Syverson for guidance and support. I also thank Ricardo Avelino, Pradeep Chintagunta, Jean-Pierre Dubé, Austan Goolsbee, Günter Hitsch, Priscilla Medeiros, Amil Petrin, José Resende, Maria Salgado, and working group participants at the University of Chicago for contributions. Financial support from Capes and the Claudio Haddad Fund Dissertation Fellowship is gratefully acknowledged. †University of Chicago, Department of Economics, 1126 E. 59th Street, Chicago, IL 60637. e-mail: [email protected].