Product adoption and pricing with network externalities

Sujoy Chakravarty, Purdue University


This thesis includes three essays that examine the impact on network externalities (demand side economies of scale) on agent behaviour in markets. Essays 2 and 3 use experimental methodology to test predictions from theory. The fourth essay analyses field data collected from a specific market that is affected by these externalities. Chapter 2 studies product adoption as modeled by Katz and Shapiro (1986) in an experimental setting. Two sellers offer competing, incompatible technologies and two groups of four buyers make purchase decisions sequentially in a two-stage game of complete information. One of these technologies enjoys well-defined property rights whereas the other one is unsponsored and supplied at cost. The sellers post prices and a different group of buyers make simultaneous purchase decisions in each stage. There is mixed evidence that the results are qualitatively consistent with the Katz and Shapiro (1986) equilibrium predictions. Chapter 3 extends the design from chapter 2 to the case in which both technologies are sponsored (also in Katz and Shapiro, 1986). In certain sessions over three-quarters of first stage buyers purchase the more expensive technology anticipating that later arriving buyers will also buy this technology. In periods where a strong network has been established for a technology in the first stage, over 80 percent of second stage buyers buy that technology, even though in most cases it is priced higher. The data collected from the experiments used in both chapters 2 and 3, however, are not consistent with the point predictions of the model. In chapter 4, we investigate the effects of various quality attributes and network specific features on the price of DOS word processing software from 1987 through 1991. We use a hedonic price framework in order to assess the effect of the network variable on the quality-adjusted price. Our results to date suggest that there is a positive effect of network externalities upon price. However product quality attributes do not significantly impact price in this market.




Cason, Purdue University.

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