How Ex Ante Inferior Innovations Can Win Races for Markets with Network Externalities

Abstract

Lack of knowledge about the true quality of alternative products (ambiguous innovations), social pressure through information bandwagon effects based on word-of-mouth, and the existence of network externalities can entail socially undesirable lock-in effects, often leading to the persistence of products in the market even if superior alternatives have become available. But can also ex ante inferior innovations win standard-battles over superior ones? We implement an agent-based computer simulation model to support our claim that a strong variance in the evaluation of the ambiguous innovations by customers can favor the diffusion of ex ante inferior innovations in the presence of local network externalities, even if there is no systematic bias in the estimation of the innovation’s true stand-alone value.