Overcoming the Coordination Problem in New Marketplaces via Cryptographic Tokens
Information Systems Research (forthcoming), Special Issue: Market Design and Analytics
81 Pages Posted: 9 Feb 2022 Last revised: 11 Jul 2022
Date Written: February 2, 2022
We study the use of platform-specific tradable cryptographic tokens to solve the coordination problem that is common in adopting new marketplaces. We show that certain characteristics of platform-specific tokens --- specifically their tradability, the ability of the platform to commit both to accept and to require these tokens in the future, and the ability to commit to a price and/or quantity schedule --- can help overcome the coordination problem and can support equilibria favorable to the new marketplace. Compared to other mechanisms in the literature to address the coordination problem --- such as subsidies of early users and promises of refunds or buy-backs if the platform fails --- platform-specific cryptographic tokens are less likely to favor established or larger firms with established reputation and financial resources.
We find that tokens allow a marketplace to trade-off future revenue for present revenue, which then can be used to address the coordination problem. On the other hand, the ability to trade out of the platform results in a smaller future network and lower total profit. Thus, if the new marketplace is not facing capital constraints, the most profitable strategy is the traditional strategy to subsidize adoption. If the new marketplace is capital constrained, however, as is often the case for new entrants and unproven technology applications, tokens can offer an alternative that is increasingly attractive as the cost of capital increases.
Keywords: economics of IS, ICO, blockchain, platforms, network effects, tokens
JEL Classification: D8, G2, O3
Suggested Citation: Suggested Citation