Networks, Options and Preemption

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 adopt. There are two main results. First, conditional on adoption being sequential, the follower adopts at the incorrect point, compared with the cooperative solution. The leader adopts at the cooperative point when there is no preemption, and too early if there is preemption. Secondly, there is insufficient simultaneous adoption in equilibrium. The paper examines how these inefficiencies vary as the degree of uncertainty and network effects change. Interesting interactions between the various factors are found. For example, the analysis raises the interesting possibility that the introduction of a small amount of uncertainty can cause the first mover to adopt the technology earlier.