Double Coordination in Small Groups

1. Double Coordination in Small Groups Luigi Mittone, Matteo Ploner, Ivan Soraperra Computable and Experimental Economics Laboratory – University of Trento, Italy IAREP/SABE - World Meeting 2008 Roma 4 September 2008

2. Motivations and Related Literature (1) • Coordination has been studied exclusively in single groups (BoS, WLG, Minimum Game, etc.). • Many interesting situations in which two groups of people must coordinate their actions on two levels: • two groups of stakeholders in a firm, • two departments of the same firm, • consumers and producers of goods with network externalities, etc.

3. Motivations and Related Literature (2) • A crossroad between two streams of literature: coordination failures and network externalities • Network externalities considered within the problem of introducing a new product • Coordination failures in large groups: the weak link coordination game

4. Technology Adoption and Network Externalities • Katz and Shapiro (AmEcRew 1985, JourPolEc 1986) • Liebowitz and Margolis (JourEcPersp 1994)

5. Katz and Shapiro (1986) p.822-823

6. Katz and Shapiro (1986)

7. Network Externalities • Network consumption externalities require that at least one specific attribute, using the Lancaster’s Theory of Consumption terminology, is almost perfectly homogeneous • Supply side competition is therefore restricted to the other attributes (first of all price) • The common attribute works as an entry barrier for the newcomers.

8. Network Externalities • Network externalities as a public good • Need for coordination to produce a Pareto efficient solution. • The specific case when the consumers must coordinate themselves to switch from a traditional product (already characterized by network externalities) to an innovative one (which we assume can produce even stronger positive externalities due to the use of a more innovative technology)

9. Coordination in Experimental Games • WEBER (AmEcRew 2006) • BORNSTEIN et al (Games&EcBehav 2002) • COOPER et al (AmEcRew 1990)

10. COOPER et al (1990) p. 218 We study a class of symmetric, simultaneous move, complete information games called coordination games. This term refers to games which exhibit multiple Nash equilibria which are Pareto-rankable.' That is, all players are better off in one equilibrium relative to another yet may be unable to explicitly coordi- nate their strategies to achieve the preferred outcome. When this occurs, a coordination failure arises.

11. WEBER (2006)BORNSTEIN et al (2002) • Weak link coordination game • Coordination failure in large groups (experimental) • Competition between groups • Progressive increase in the size of the group

12. Weak Link Coordination Games Source: Weber, 2006

13. Two Groups, Two Goods, Double Coordination • One group are the “consumers” • One group are the “producers” • Positive network externalities for both groups • Multiple Nash equilibria • Not a weak link game • One innovative good • One traditional good

14. Interaction Structure • Coordination Game • 2 Pareto-ranked equilibria • Two actions • T(raditional good) • I(nnovative good)

15. Interaction Structure • Groups of 10 • 5 players role A • 5 players role B • 30 repetitions with feedback • 1 repetition rewarded (random pick) • 2 experimental treatments • Baseline (two different payoffs structures) • Treatment (two different payoffs structures)

16. Baseline(1) • Symmetric game • 2 Nash equilibria • All players choose I; All players choose T • Dominant strategy is to choose what the majority of the members of the other group chooses (independently from one`s own group)

17. Treatment (1) • Asymmetric game • 2 Nash equilibria • All players choose I; All players choose T • Dominant strategy for role A is to choose what the majority of role B chooses • Dominant strategy for role B is to choose what the majority of role B chooses

18. Baseline(2) • Same properties of Baseline 1 but • Focal point in the NW corner • Weaker risk perception for the I move

19. Treatment (2)

20. Summary • Baseline • Players A (e.g., consumers) and Players B (e.g., producers) must build a belief on the preferred choice of the other group • Treatment • Players B (e.g., producers) have a greater power in determining the equilibrium • In setting (2) option I is less risky than in (1) setting

21. Predictions • Baseline • Due to the simmetry of the incentives across groups and to the “balanced” payoff structure of the two matrices we expect a fast convergence towards one of the two equilibria. • Treatment • Players B can pull towards one of the two goods • If no coordination at the beginning then the choice of majority of Bs will attract the other players in the game • In (2) more global coordination on I,I than in (1)

22. Procedures and Participants • 60 Participants • Students of the University of Trento, Italy • Computerized experiment • Web-based • Average earnings • $$$ • Time required • About 1h 30min

23. Results Payoffs1 • In the baseline a fast coordination on I is observed • In the treatment coordination on I is slower (or it does not even occur !)

24. Results Payoffs 2 • When the risk of choosing I is low all the people immediately coordinates on the Pareto Dominant equilibrium

25. Preliminary Conclusions • A very high rate of coordination compared to the coordination levels reported in the literature • Slower coordination in Treatment(1) when compared to Baseline(1) • Need for a more detailed individual level analysis