Networks, Options and Preemption

Robin Mason and Helen Weeds

No 269346, Economic Research Papers from University of Warwick - Department of Economics

Abstract: This paper examines the irreversible adoption of a technology whose returns are uncertain, when there is an advantage to being the first adopter, but a network advantage to adopting when others also do so. Two patterns of adoption emerge: sequential, in which the leader aggressively preempts its rival; and a more accommodating outcome in which the firms adopt simultaneously. There are two main results. First, conditional on adoption being sequential, the follower adopts at the incorrect point, compared to the co-operative solution. The leader adopts at the co-operative point when there is no preemption, and too early if there is preemption. Secondly, there is insufficient simultaneous adoption in equilibrium. The paper examines the effect of uncertainty, network effects and preemption on these inefficiencies. Standard results do not always hold. For example, the analysis raises the unusual possibility that an increase in uncertainty may cause the first mover to adopt the technology earlier.

Keywords: Agricultural and Food Policy; Industrial Organization; Research and Development/Tech Change/Emerging Technologies (search for similar items in EconPapers)
Pages: 39
Date: 2000-06-29
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwarer:269346

DOI: 10.22004/ag.econ.269346

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