An Introduction to the Economics Literature on Standard Setting Organizations

Interoperability and Standards

Article Snapshot

Author(s)

Neil Gandal

Source

in The Standards Edge: Unifier or Divider?, Sherrie Bolin, ed., Chelsea: Sheridan Books, 2007, pp. 109-111

Summary

This article summarizes new economic studies of standards setting organizations.

Policy Relevance

Economic theories of standard setting organizations are underdeveloped and standards policy should be implemented delicately.

Main Points

  • Firms may not want to produce similar products operating on incompatible standards.  For example, it is risky to introduce two types of video players simultaneously, because one may not only undersell but fade from the market entirely, as happened with Sony’s Betamax machine when the VHS standard came to dominate the market.

    • In industries where it’s important for products from different firms to interoperate, like telephone communication, competing standards might even lead to a complete market collapse.
       
  • In order to avoid this risk, firms often collaborate to set standards that all firms adhere to, and standard-setting organizations have both competitive and cooperative aspects.

    • Firms often share technological knowledge through standards setting organizations; participation seems to predict the future development of patents.

    • However, firms may attempt to impose the use of their patented technologies in standards to extract royalties from other firms.

    • Participation in standards committees by commercial, rather than purely technical, organizations seems to increase the time required to develop an acceptable standard.
       
  • Theoretical models of strategic standard-adopting behavior by firms are poorly developed.  New models could improve the literature by considering technical business practices and legal institutions more explicitly.

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