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Networks, options and preemptions

Networks, options and preemptions
Networks, options and preemptions
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. Preemption may actually increase the time to first adoption, since simultaneous adoption is more likely to occur in equilibrium with preemption. The analysis also raises the unusual possibility that an increase in uncertainty may cause the first mover to adopt the technology earlier.
13
University of Southampton
Mason, R.
1a906445-3ab5-4208-a0fc-4df6e51a2b72
Weeds, H.
cea65cab-4c7f-4711-a325-1a7a1c96b474
Mason, R.
1a906445-3ab5-4208-a0fc-4df6e51a2b72
Weeds, H.
cea65cab-4c7f-4711-a325-1a7a1c96b474

Mason, R. and Weeds, H. (2000) Networks, options and preemptions (Discussion Papers in Economics and Econometrics, 13) Southampton, UK. University of Southampton

Record type: Monograph (Discussion Paper)

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. Preemption may actually increase the time to first adoption, since simultaneous adoption is more likely to occur in equilibrium with preemption. The analysis also raises the unusual possibility that an increase in uncertainty may cause the first mover to adopt the technology earlier.

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Published date: 2000

Identifiers

Local EPrints ID: 33114
URI: https://eprints.soton.ac.uk/id/eprint/33114
PURE UUID: e237b582-67b7-4448-9c00-86499123e89b

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Date deposited: 19 Jul 2006
Last modified: 17 Jul 2017 15:54

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