Journal of Economic Behavior & Organization 76 (2010) 759–773 Contents lists available at ScienceDirect Journal of Economic Behavior & Organization journal homepage: www.elsevier.com/locate/jebo Investment decisions and coordination problems in a market with network externalities: An experimental study Vincent Mak a,∗ , Rami Zwick b,1 a Judge Business School, University of Cambridge, Trumpington Street, Cambridge CB2 1AG, United Kingdom b Department of Management and Marketing, A. Gary Anderson Graduate School of Management, University of California, Riverside, Riverside, CA 92521, United States article info Article history: Received 27 May 2008 Received in revised form 27 August 2010 Accepted 30 August 2010 Available online 15 September 2010 JEL classification: C72 C92 D62 Keywords: Network externalities Critical mass Coordination Strategic uncertainty Multi-person game Experimental economics abstract We study decision-making and the associated coordination problems in an experimental setting with network externalities. Subjects decide simultaneously in every round how much to invest out of a fixed endowment; the gain from an investment increases with total investment, so that an investment is profitable iff total investment exceeds a critical mass. The game has multiple, Pareto-ranked equilibria; we find that whether first-round total investment reaches critical mass predicts convergence towards the Pareto optimal full- investment equilibrium. Moreover, first-round investments and equilibrium convergence vary with critical mass and group size in a complex way that is explicable by subtle effects of strategic uncertainty on decision making. © 2010 Elsevier B.V. All rights reserved. 1. Introduction How do economic agents make decisions on their actions, when the payoff of an action depends endogenously on the collective actions of many agents? This question emerges in many realistic situations. For example, the benefit to a firm in subscribing to a new teleconferencing service depends on how many other firms also subscribe to the service. A new business growth opportunity – such as the Internet in the 1990s or an undeveloped region with tourism potential – is profitable to invest in iff the total amount of investment committed to it is high enough to generate market attention, further development, and profits. In this paper, we look at a class of these situations that is stylized as investing in the presence of network externalities. A market exhibits (positive direct) network externalities when the gain from an investment increases with the total investment in the market. 2 A common consequence is that an investment incurs a net profit iff the total investment exceeds a critical ∗ Corresponding author. Tel.: +44 01223 764295; fax: +44 01223 339701. E-mail addresses: v.mak@jbs.cam.ac.uk (V. Mak), rami.zwick@ucr.edu (R. Zwick). 1 Tel.: +1 951 827 7766; fax: +1 951 827 3970. 2 Network externalities as discussed here are also called direct network effects. Other types of network effects include indirect network effects, which arise when there is interdependent demand between different products or services in a market. Examples include video consoles and games (Shakar and 0167-2681/$ – see front matter © 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.jebo.2010.08.017