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

The Experimental Approach to Innovation: a New Research Field for the CEEL Two work in progress projects: –A nation wide field study on coordination in non-profit firms – knowledge sharing and dissemination within organizations (U-Know Project financed by the EU) –Coordination and innovation within the network externalities frame

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.

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

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

Katz and Shapiro (1986) p

Katz and Shapiro (1986)

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.

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)

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

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.

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

Weak Link Coordination Games Player’s choice Minimum choice of all players Source: Weber, 2006

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

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

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)

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)

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

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

Treatment (2)

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

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)

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

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 !)

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

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