Does the market kill bad ideas? An institutional comparision of committees and markets in network industries

Prabal Roy Choudhury () and Debadatta Saha
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Prabal Roy Choudhury: Indian Statistical Institute, New Delhi
Debadatta Saha: Indian Statistical Institute, New Delhi
Authors registered in the RePEc Author Service: Prabal Roy Chowdhury ()

Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers from Indian Statistical Institute, New Delhi, India

Abstract: The paper analyzes the problem of protocol coordination between two firms, where one firm has private information about its own protocol. The institutional characteristics of the market and the class of strategies adopted by the firms admit multiple equilibria in the market. Of these, one particular equilibrium has an interior information revelation cutoff for the firm with private information. This demonstrates that the market might not be able to "kill bad ideas", but it does "reward good ideas". In contrast, the institutional design of the committee ensures that the same class of strategies gives rise to a unique equilibrium in the committee, with the informed firm revealing all private information. The committee game results generalize easily to multiple periods as well as to multiple firms and is robust to an exit option. The market game result holds for a certain range of parameter values for multiple firms.

Keywords: Networks; standardization; coordination; asymmetric information; institutional design (search for similar items in EconPapers)
JEL-codes: L14 L15 D82 D02 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-ino and nep-net
Date: 2009-06
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