doi 10.1287/mksc.1050.0118 ©2005 INFORMS Cheap Talk and Bogus Network Externalities in the Emerging Technology Market

Many emerging technologies exhibit path-dependent demands driven by positive network feedback. Suchnetwork effects profoundly impact marketing strategists ’ thinking in today’s network economy. However, the significant network externalities expected by many people often fail to materialize in the emerging tech-nology market. We analyze this phenomenon in the context of a technology distribution channel. By studying cheap-talk strategies under information asymmetry, we show that incentive-compatible contracts are essential for achieving credible information transmission. In our model, the better-informed technology vendor has an incen-tive to inflate the retailer’s ex ante belief of network externalities when a wholesale price contract is adopted. When properly termed revenue-sharing contracts are implemented, there are information-efficient cheap-talk equilibria where truthful information transmission is mutually beneficial. When the vendor’s information is imperfect, even revenue-sharing contracts cannot guarantee credible information transmission if there is sig-nificant prior belief disparity between the vendor and the retailer. This study demonstrates how information-inefficient equilibria (e.g., information blockage) arise because of the conflict of interest or the conflict of opinion among channel members. It also explores the role of cheap talk in facilitating channel coordination. Key words: behavioral game theory; channels of distribution; cheap-talk game; conflict of opinion; demand signaling; emerging technologies; network externalities; revenue sharing; strategic information transmission History: This paper was received October 1, 2003, and was with the author 5 months for 2 revisions; processed by John Zhang