Review of Industrial Organization 23: 233–254, 2003.
© 2004 Kluwer Academic Publishers. Printed in the Netherlands.
Experimental Evidence on Product Adoption in the
Presence of Network Externalities
Department of Information Systems and Operations Management, School of Management,
University of Texas at Dallas SM 33, 211400, Richardson, TX 75083-0688, USA (E-mail:
Abstract. The beneﬁts accruing to a purchaser of a product due to the existing base of consumers
of the same or compatible products are known as network externalities. This paper studies Katz
and Shapiro’s (1986) model of network externalities in an experimental setting. Two sellers choose
prices for competing technologies sold to two groups of four buyers purchasing sequentially in two
stages. The results are qualitatively consistent with Katz and Shapiro’s equilibrium predictions. In
certain sessions over three-quarters of ﬁrst stage buyers purchase the more expensive technology
anticipating that later arriving buyers will also buy this technology. In periods where a strong network
has been established for a technology in the ﬁrst stage, over 80 percent of second stage buyers buy
that technology, even though in most cases it is priced higher. The data, however, differ from the
point predictions of the model.
Keywords: Coordination games, network externalities, technology adoption
JEL Classiﬁcation: C9, C7, L1
This paper presents a laboratory experiment to examine the effects of the size of a
network of users on the pricing and adoption of a pair of competing technologies.
Central to the markets for technologies like packaged software, consumer audio
and video components (and perhaps some traditional durable products like auto-
mobiles) is the idea that the beneﬁts to a consumer from a good is increasing in
the installed base of other consumers using the product, an effect referred to as
network externalities or demand side economies of scale. Network externalities
may exceed the intrinsic utility provided by the product or service: the telephone
has been posited as a leading example of a technology whose beneﬁts arise almost
solely from network externalities.
One reason that network externalities have been of interest to economists is
that they can lead to a condition described as a “lock-in” or “path dependency”.
A lock-in occurs when a particular technology emerges as a standard and remains
one for reasons other than its quality. The standard QWERTY keyboard design