A network market is a market in which the benefit each consumer derives from a good is an increasing function of the number of consumers who own the same or similar goods. A major obstacle that plagues the introduction of a network good is the ability to reach critical mass, namely, the minimum number of buyers required to render purchase worthwhile. This can be likened to a coordination game with multiple Pareto-ranked equilibria. Through a series of experiments, we study consumers' ability to coordinate on purchasing the network good. Our results highlight the central importance of the size of the critical mass. Neither an improved reward-risk ratio through lower prices nor previous success at a lower critical mass facilitates the establishment of a network market when the critical mass is sufficiently high.
Bibliographical noteFunding Information:
We wish to thank Simon Gächter, Yossi Speigel, two anonymous reviewers, the associate editor, Douglas Davis, and seminar participants at numerous conferences and departmental seminars for valuable comments. Amihai Fischler programmed the experimental software. Financial support from the Department of Economics at Ben-Gurion University and from the Adar Foundation at Bar-Ilan University is gratefully acknowledged. A previous version of this paper circulated under the title “Coordination and Critical Mass in a Network Market: An Experimental Investigation”.
© 2015 Elsevier Inc.
- Coordination game
- Critical mass
- Experimental economics
- Network goods