DP4995 Equilibria in a Dynamic Global Game: The Role of Cohort Effects

Author(s): Paul Heidhues, Nicolas Melissas
Publication Date: April 2005
Keyword(s): coordination, equilibrium selection, global game, period-speciifc network effects, strategic complementarities, strategic waiting
JEL(s): C72, C73, D82, D83
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4995

We introduce strategic waiting in a global game setting with irreversible investment. Players can wait in order to make a better informed decision. We allow for cohort effects and discuss when they arise endogenously in technology adoption problems with positive contemporaneous network effects. Formally, cohort effects lead to intra-period network effects being greater than inter-period network effects. Depending on the nature of the cohort effects, the dynamic game may or may not satisfy dynamic increasing differences. If it does, our model has a unique rationalizable outcome. Otherwise, there exist parameter values for which multiple equilibria arise because players have a strong incentive to invest at the same point in time others do.