Network Externalities and Standardization: A Classroom Demonstration

Abstract

This paper presents a classroom game that can be used to demonstrate network externalities, standardization, and switching costs. In the basic game, students independently choose a technology whose value depends on the total number of students choosing that technology. In the next round, sequential decision making is allowed that quickly leads to standardization. Introducing imperfect information and switching costs into subsequent rounds can lead to the real‐world phenomenon of an inferior technology becoming the standard. This exercise can be used in principles of economics classes to teach these important concepts without requiring mathematical models. In more advanced classes, construction of the mathematical model behind the game may be assigned.