Diffusion Games

Behaviors and information often spread via person-to-person diffusion. This paper highlights how diffusion processes can facilitate coordination. I study contagion in a discrete network with Bayesian players. In addition to characterizing the extent and rate of adoption, we uncover a new effect: when large cascades are possible in equilibrium, exposure conveys information about a player’s network position. This effect underscores a novel trade-off in the design of marketing campaigns, suggesting conditions under which word-of-mouth is relatively more effective. A generalization of the model to multi-type networks suggests a new approach to targeted seeding. (JEL D83, D85, M31, M37, Z13)