Network dynamics : Heterogeneity, rationality and inertia

Abstract

Revisiting the work of Farrell and Saloner (1985, 1986) on the processes of technological adoption or choice of standard, this article analyzes the problems related to the timing of decisions and deepens the study of the inertia effect in these situations. We focus our analysis on the interaction of network effects and informational externalities to show that the information revelation, through its backward and forward effects, can in some cases eliminate inefficient inertia while all the literature on networks has mostly focused on the bandwagon effects systematically giving rise to momentum behaviors or more oftenly excessive inertia. In an incomplete information framework on agent preferences, we add to our model the possibility of a transitional incompatibility situation as well as any switching cost situation in such a way as to examine without bias and completely the impact of the dissemination of information on the adoption decisions of agents. Finally, some of our results on equilibrium strategies and optimality can be reinterpreted from the point of view of the heterogeneity of the population, in terms of preferences or ability to process information. Some types of agents that do not react to their environment will lead to a bias in the decisions of sophisticated agents and influence in a « disproportionate » way the result and the optimality of the game.