Investment with network externality under uncertainty

Abstract

The purpose of this paper is to develop a real option model with a stochastic network size to simultaneously consider firm`s investment and household`s consumption behaviors in an equilibrium framework. First, the consumer`s waiting-to-buy effect is crucial in determining trigger network size of firm`s investment. Second, increasing network externality has an ambiguous effect on trigger network size of firm`s investment. Third, using NPV rule not only underestimates trigger network size but, also possibly results in the misleading relationship between network externality and trigger network size.