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The B.E. Journal of Theoretical Economics

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A Simple Inducement Scheme to Overcome Adoption Externalities

In-Uck Park1

1University of Pittsburgh,

Citation Information: Contributions in Theoretical Economics. Volume 4, Issue 1, ISSN (Online) 1534-5971, DOI: 10.2202/1534-5971.1103, June 2004

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Customers of network commodities face coordination problems due to adoption externalities that give rise to multiple, Pareto-ranked equilibria. We investigate the extent to which the coordination problem can be resolved by inducement schemes when agents' preferences are private information. Specifically, we show that all symmetric ``cutoff strategy'' profiles constitute the set of profiles uniquely implementable under an inducement scheme. We derive the ex ante cost of implementing each such profile and characterize simple inducement schemes of the following form that implement it: each scheme specifies a fixed fee that every adopter pays, and a fixed gross subsidy/prize to be randomly allocated to the adopters. We discuss the implications of these findings on the design of optimal schemes for different network organizers. We extend the analysis to preference revelation mechanisms and prove a revenue equivalence result and characterize optimal mechanisms, but find that unique implementation is no longer possible.

Keywords: adoption externality; coordination; revenue equivalence; optimal mechanism

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