Excess Intertia and Cross-Model Validation

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Excess Inertia

Suppose that you are a typical firm in the Farrell and Saloner game. You would enjoy the highest possible profit if both you and your competitor switched to the superior standard. However, you do not know the other firm's payoffs, so there is a chance that the other firm will not switch standards, even if you switch first. If this happens, you stand to loose a substantial amount of profit. If the loss is great enough, you will rationally decide not to switch.

Of course, the other firm may well be in the same position you are. Both firms would then be best off with the superior standard, but neither would be willing to initiate the switch. This is an example of the phenomenon called excess inertia.

Excess inertia occurs when a particular compatibility switch would result in increased social benefit, but each player (a firm or a consumer) is not willing to initiate it, unsure if others will follow. In the remainder of this topic, we attempt to demonstrate excess inertia using the Katz and Shapiro model.

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