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We model the introduction of a new payment method that competes with an existing payment method. Due to network adoption effects, there are two symmetric pure strategy equilibria in which only one of the two payment methods is used. The equilibrium where only the new payment method is used is socially optimal. In an experiment, we find that, depending on the fixed fee for acceptance of the new payment method and on the choices made by participants on both sides of the market, either equilibrium can be selected. An evolutionary learning model provides a good characterization of our experimental data.
From:
Jasmina Arifovic
Simon Fraser University
John Duffy
University of California, Irvine
Janet Hua Jiang
Bank of Canada
We model the introduction of a new payment method that competes with an existing payment method. Due to network adoption effects, there are two symmetric pure strategy equilibria in which only one of the two payment methods is used. The equilibrium where only the new payment method is used is socially optimal. In an experiment, we find that, depending on the fixed fee for acceptance of the new payment method and on the choices made by participants on both sides of the market, either equilibrium can be selected. An evolutionary learning model provides a good characterization of our experimental data.
From:
Jasmina Arifovic
Simon Fraser University
John Duffy
University of California, Irvine
Janet Hua Jiang
Bank of Canada