Analyzing the Decision of Investment with Network Externality by Real Option Approach under the Uncertain Network Size

This paper develops a model with uncertain network size and it extends the traditional real option theory to take not only the decisions of firms but also the decisions of consumers into consideration. There are three main contributions in this dynamic equilibrium model: (1).In general, the stronger the network externality is, the more possible a negative relationship between volatility and the trigger number of consumers exists; (2). With uncertainty of the network size of the product, the policy of lump sum subsidy to consumers is definitely better than the policy of lump sum subsidy to a firm; and (3).This paper offers a dynamic model of a volatile network size so that in the future many interesting issues related to network externality can be analyzed by real option approach under an equilibrium model Key words:Uncertain Network Size, Real Option, Investment, Network Externality.