A Deposit-Refund Scheme for the Diffusion of Goods with Network Externalities
29 Pages Posted: 15 May 2015 Last revised: 15 Apr 2016
Date Written: July 24, 2015
Goods whose benefits increase as the number of users increases, such as fax machines and electric cars, are called "network products," and their related effects are called "network externalities." The diffusion of network products is hampered by private or incomplete information because players do not know each other's preferences for the network product, which makes it difficult for them to coordinate their actions.
To solve this problem, we propose a new scheme that introduces subscription deposits. We show that our scheme has a dominance-solvable equilibrium and, in the equilibrium outcome, network products rapidly become widespread. We use a laboratory experiment to show that the scheme increases social welfare. Moreover, this scheme works from the first round; i.e., players do not have to learn behavior through trial and error. Our results show that this scheme is useful for diffusing network products.
Keywords: Coordination failure, Network externalities
JEL Classification: C91, H23
Suggested Citation: Suggested Citation