Winner-Take-All Dynamics Revisited : Positive Feedback When Earlier Adopters ’ Influence Decays

The literature on network effects has a longstanding controversy regarding the possibility that markets may lock into an inferior technology. This controversy was triggered by Arthur’s (1989) model of positive feedback (success begets more success) in markets with competition between incompatible technologies. Critics point to the lack of compelling evidence for such lock-in. This confusion, in part, stems from a hidden assumption in the Arthur model influence of adopters never decays. We shed new light on this confusion by examining the implications of influence that decays over time. In the absence of influence decay, there is a good possibility that a market will lock-in to an inferior technology, as shown by prior work. However, when the influence of earlier adopters decays over time, the possibility of lock-in to an inferior technology is substantially attenuated. Despite the existence of positive feedback, this decay triggers a protracted period of technology competition, which provides the opportunity for the market to redress premature lock-in to an inferior technology. WINNER-TAKE-ALL DYNAMICS REVISITED: POSITIVE FEEDBACK WHEN EARLIER ADOPTERS’ INFLUENCE DECAYS Sanghyun Park Seoul National University Seoul, South Korea sanghpark4@gmail.com Hart E. Posen University of Wisconsin-Madison Madison, Wisconsin hposen@wisc.edu Jeho Lee Seoul National University Seoul, South Korea jeho0405@snu.ac. kr May 5, 2018 Preliminary Draft Winner-Take-All Dynamics Revisited WINNER-TAKE-ALL DYNAMICS REVISITED: POSITIVE FEEDBACK WHEN EARLIER ADOPTERS’ INFLUENCE DECAYS ABSTRACT The literature on network effects has a longstanding controversy regarding the possibility that markets may lock into an inferior technology. This controversy was triggered by Arthur’s (1989) model of positive feedback (success begets more success) in markets with competition between incompatible technologies. Critics point to the lack of compelling evidence for such lock-in. This confusion, in part, stems from a hidden assumption in the Arthur model — influence of adopters never decays. We shed new light on this confusion by examining the implications of influence that decays over time. In the absence of influence decay, there is a good possibility that a market will lock-in to an inferior technology, as shown by prior work. However, when the influence of earlier adopters decays over time, the possibility of lock-in to an inferior technology is substantially attenuated. Despite the existence of positive feedback, this decay triggers a protracted period of technology competition, which provides the opportunity for the market to redress premature lock-in to an inferior technology.The literature on network effects has a longstanding controversy regarding the possibility that markets may lock into an inferior technology. This controversy was triggered by Arthur’s (1989) model of positive feedback (success begets more success) in markets with competition between incompatible technologies. Critics point to the lack of compelling evidence for such lock-in. This confusion, in part, stems from a hidden assumption in the Arthur model — influence of adopters never decays. We shed new light on this confusion by examining the implications of influence that decays over time. In the absence of influence decay, there is a good possibility that a market will lock-in to an inferior technology, as shown by prior work. However, when the influence of earlier adopters decays over time, the possibility of lock-in to an inferior technology is substantially attenuated. Despite the existence of positive feedback, this decay triggers a protracted period of technology competition, which provides the opportunity for the market to redress premature lock-in to an inferior technology.