ON THE ADOPTION OF INNOVATIONS WITH NETWORK EXTERNALITIES

We present a simple dynamic model of adoption of an innovation when there are 'network' externalities, that is, when one agent's benefit from adoption increases with the number of other adopters. We assume there is a continuum of differentiated potential adopters who are perfectly informed rational agents. Our main conclusion is that if network externalities are strong, then the equilibrium adoption path is discontinuous, even when there is no coordination between potential adopters. We also argue that a steep S-shaped adoption path can be interpreted as the approximation to a discontinuous point (catastrophe) of the equilibrium adoption path. © 1990.