Bounded Rationality on Consumer Purchase Decisions and Product Diffusion Under Network Externalities: A Study Using Agent-Based Simulation and Experiments with Human Subjects

Abstract

This study addresses mechanisms of purchase decision-making under network externalities. In particular, we examine how bounded rationality affects product diffusion in markets where network externalities are present. In response to rapid development of information communication technology, markets with network externalities have been expanding recently. If network externalities are present, then a consumer’s utility depends on the number of same product users. In other words, the product value is determined through consumers’ interaction in society. Therefore, the elucidation of the mechanism is required. For this purpose, this study adopts an integral approach with agent-based simulations and experiments with human subjects. We use a simple decision-making model constructed by Ueda et al. [1] to conduct experiments with human subjects based on the method of experimental economics. Additionally, we construct agents who make the bounded rational actions observed in the experiments and examine how product diffusion emerges through interaction of such bounded rational agents. Results show that bounded rationality of subsequent decision-makers affects the purchase behavior of preceding consumers. Accordingly, the output of product diffusion is varied.