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Networks, options and preemption

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Mason, Robin and Weeds, Helen (2000) Networks, options and preemption. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.575).

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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 ineffciencies. 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.

Item Type:

Working or Discussion Paper (Working Paper)

Subjects:

H Social Sciences > HC Economic History and Conditions

Divisions:

Faculty of Social Sciences > Economics

Library of Congress Subject Headings (LCSH):

Real options (Finance), Technological innovations, Technology transfer, Business networks

Series Name:

Warwick economic research papers

Publisher:

University of Warwick, Department of Economics

Place of Publication:

Coventry

Official Date:

29 June 2000

Dates:

Date	Event
29 June 2000	Published

Number:

No.575

Number of Pages:

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access

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