Coordination Games

________________________________________________________________________________________________________________________________________________

coordination game:

All agents in a coordination game derive their highest payoffs if they simultaneously choose the same strategy. In these games positive network externalities exist that incentivise all agents to prefer all agents to make the same choice, but no agent has any fundamental reason to prefer any of the available options over all others. Suppose, for example, that two carmakers are each trying to build hybrid cars, and that several alternative battery systems are each equally efficient and each has identical manufacturing costs. If both carmakers adopt the same system, only one type of specialized equipment will be required at shops spread around the country that service these batteries. Each carmaker is otherwise indifferent between these battery systems, so both wish to adopt the same system, and a Nash equilibrium exists when both choose the same strategy.

In this payoff matrix for a coordination game, Cyber-Vitamins, a health food store and Robusto, a gym, are each indifferent between locating in Mall A or Mall B. However, positive network externalities are realized if they locate in the same mall because they draw from the same customer base, and their customers will, on average, experience lower transaction costs if the two firms locate in the same mall. Each gains an extra $100,000 per year if they locate in the same mall.

		Cyber-Vitamins
		Mall A	Mall B
Robusto	Mall A	100, 100	0, 0
	Mall B	0, 0	100, 100

________________________________________________________________________________________________________________________________________________

Author: Ralph Byrns

Economics instructors and students are hereby granted provisional permission to use these materials for educational purposes only. Commercial use of any of these materials is forbidden. Withdrawal of this permission may be announced at this site without notice, and these materials may not be used thereafter without written permission.