Discontinuous Adoption Paths With Dynamic Scale Economies

This paper examines the equilibrium adoption patch for two innovations when there are "network externalities". We show that the existence of significant increasing returns in system-scale can give the result that one variant will drive out the other one and so emerges as the unique standard for the industry. Moreover, if "network externalities" are sufficiently strong, then the equilibrium adoption path is discontinuous, that is, it includes a catastrophe point.