Abstract
AbstractThis article studies the decentralized adoption of a technology standard when network effects are present. If the new standard is incompatible with the current installed base, adoption may be inefficiently delayed. I quantify the magnitude of “excess inertia” in the switch of the movie distribution and exhibition industries from 35 mm film to digital. I specify and estimate a dynamic game of digital hardware adoption by theatres and digital movies supply by distributors. Counterfactual simulations establish that excess inertia reduces surplus by $16\%$ relative to the first-best adoption path; network externalities explain $41\%$ of the surplus loss. Targeted adoption subsidies or a mandate on digital distribution help bridge this welfare gap.
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