Network Externalities and Discontinuous Adoption Paths

The possibility that agents may react discontinuously to continuous changes in their environments does not seem to have been sufficiently investigated in economics. Intuition suggests that continuously changing causes should produce continuous effects. However, as we discussed in Chapter 2, catastrophe theory makes clear that the occurrence of discontinuities in smoothly evolving systems is not an unlikely event. One of the purposes of this chapter is to show that ‘catastrophes’ can arise in a simple model of the adoption of innovations when self-reinforcing mechanisms are introduced.