Chapter 5: Massive Coordination Games

Overview

We look for opportunities with network externalities—where there are advantages to the vast majority of consumers to share a common standard.

Bill Gates^[1]

In the last chapter, we discussed simultaneous games and learned about various classifications of games. In this chapter we will focus on coordination games with millions of players. Recall that in coordination games the players need to synchronize their actions.

The introduction of the first telephones created a coordination game among its potential customers. If everyone else was going to get one then it made sense for you to get one too. If, however, no one you knew was planning to get a phone then it would be silly for you to buy one. Telephones are valuable only when commonly owned since the benefits of having a telephone are proportional to the number of your family members, friends, and associates who are also on the telephone network. Telephones exhibit network externalities because they become more valuable when more people own them. Network externalities give rise to mass coordination games.

Network externalities—the more people who have the product, the more valuable the product becomes.

You should buy a device that exhibits network externalities only if people you interact with also have the product or plan to buy it soon. Many products other than telephones exhibit network externalities. For example, no matter how much you might be impressed by the technology underlying fax machines, the pleasure you would receive by faxing yourself documents would probably not justify the machine’s cost.

Network externalities are the dominant strategic consideration in the computer industry. Indeed, Microsoft owes its vast success to network externalities.

^[1]“Microsoft, 1995 (Abridged),” Harvard Business School Case No. 799–1003, 1.