A Two-Step Subsidy Scheme to Overcome Network Externalities in a Dynamic Game

Abstract

Many goods have network externalities. When the number of agents possessing such goods is small, the agents may not gain sufficient utility from the goods. Agents then have an incentive to delay their purchasing decisions. Such delays have negative effects on the agents' utility, so equilibrium with delays is inefficient. We propose a method of resolving this problem using a two-step scheme with participation fees and subsidies. If this method is used, and certain conditions are satisfied, all agents purchase the good and the delay in equilibrium decreases.