CEU Electronic Theses and Dissertations, 2014
| Author | Pálinkó, Gábor |
|---|---|
| Title | Herding in markets with network externalities: the impact of advertisements and autonomy on the behavior of consumers |
| Summary | In this paper I develop a herding model to examine the behavior of consumers in markets with network externalities. I build a sequential game theoretic model with incomplete information about product quality. Consumers enjoy positive network externalities from a new product only if at least half of them purchases the product; otherwise their expected payoff is smaller than status quo. The results indicate that herding on purchasing the product occurs with smaller probability than without payoff externalities; early players face the risk of being the only consumers of the new product, hence hesitate to purchase. The model provides an alternative, herding based explanation why firms face significant entry barriers in markets with network externalities. Public advertisements that signal product quality are an efficient way to convince early consumers to enter the market; it increases their belief about product quality and about the probability that subsequent consumers purchse the product as well. Therefore, the impact of advertisements is stronger with this specific form of payoff externality. Consumers always welcome more precise advertising signals, however, increasing the precision of the advertising signal might hurt consumers by preventing social learning. Introcuding heterogeneity to the extent to which consumers takes into consideration the behavior of others leads to enhanced social learning: autonomous players always follow their own signal and sophisticated players learn the true value of product quality. |
| Supervisor | Kondor, Péter |
| Department | Economics MA |
| Full text | https://www.etd.ceu.edu/2014/palinko_gabor.pdf |
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