Standardization and Network Externalities

Standardization and Network Externalities

Sangin Park (Seoul National University, Republic of Korea)
DOI: 10.4018/978-1-59140-938-0.ch014
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Abstract

The standardization issue in the ICT industry is mainly compatibility in the presence of network externalities. The compatibility in Economics usually means interoperability between competing products. For instance, the VHS VCRs and the Betamax VCRs are incompatible in the sense that tapes recorded in one format (e.g., VHS) could not be played in the other format (e.g., Betamax). Hence, in the ICT industry, standardization mainly signifies achieving compatibility. Standards can be achieved by mandatory or voluntary measures as well as by de facto standardization. It is an important policy issue whether the government should mandate a standard (or impose compatibility), let the stakeholders (especially, firms) decide a standard, or enforce sponsoring firms to compete in the market, which has substantial impacts on consumer (or end user) well-being as well as business strategies in R&D, technology sponsorship, and competition in the product market. Ultimately, the impacts of standardization policies should be analyzed in terms of costs and benefits of firms (i.e., profit analysis) and the society (i.e., welfare analysis). In this chapter, we suggest an analytical framework to provide a consistent review of theoretical and empirical models of firms’ and consumers’ (or end users’) incentives and behavior under different standardization policies. The chapter is organized as follows. In section 2, we will discuss the Katz and Shapiro model which analyzes how compatibility (or standardization) affects firms’ optimization behavior in the product market and whether private incentives for compatibility are consistent with the social incentive. Section 3 will shift our focus onto the consumer’s adoption decision of new technology over old technology. We will discuss the pioneering Farrell and Saloner model which studies whether consumers’ adoption decision of incompatible new technology is socially optimal. Then we will proceed to introduce several important extensions of the model. The dynamics of standardization process will be explored in section 4. Based on the empirical study of Park (2004a), the de facto standardization of the VHS format in the U.S. home VCR market will be analyzed and further utilized to understand strategic aspects of standardization. Despite recent economists’ attentions to the issue of standardization and network externalities, the literature itself still lags behind reality. In section 5, we will examine ongoing and future research issues requiring further cost-benefit analyses based on economic models. Section 6 will conclude.

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Table of Contents
Preface
Kai Jakobs
Chapter 1
Henk J.D. Vries
A scientific community needs well-defined and agreed-upon concepts with related terms as a basis for a sound academic discourse. The field of IT... Sample PDF
IT Standards Typology
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Chapter 2
Ken Krechmer
An open society, if it utilizes communications systems, requires open standards. The personal-computer revolution and the Internet have resulted in... Sample PDF
Open Standards Requirements
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Chapter 3
Alfred G. Warner
This chapter extends the examination of block alliances in standard setting from market-driven to formal or committee-based processes in the... Sample PDF
Block Alliances and the Formation of Standards in the ITC Industry
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Chapter 4
Tineke M. Egyedi, Ruben V.W.D. Joode
Open-source software (OSS) offers programmers the opportunity to elaborate and adapt source code. It is an opportunity to diverge. We would... Sample PDF
Standardization and Other Coordination Mechanisms in Open Source Software
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Chapter 5
Tineke M. Egyedi
This chapter analyzes the rhetoric that surrounds the problem of consortia, that is, the supposed lack of democratic procedures. The social shaping... Sample PDF
Beyond Consortia, Beyond Standardization? Redefining the Consortium Problem
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Chapter 6
Marc V. Wegberg
The consortia movement in the standardization world has led to a fragmentation of standardization processes. This fragmentation is partly of a... Sample PDF
Standardization and Competing Consortia: The Trade-Off between Speed and Compatibility
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Chapter 7
M. H. Sherif
This chapter presents an analysis of the political, marketing, and technical aspects associated with the perception that standardization is slow. A... Sample PDF
When is Standardization Slow?
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Chapter 8
Jürgen Wehnert
There is one thing most people seem to know about standardisation: It is slow. While innovation rates and product cycles grow shorter the principal... Sample PDF
Ready – Set – Slow: A View from Inside a CEN Working Group
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Chapter 9
Gary Lea
The author seeks to illustrate some of the ongoing problems that patents present for those seeking to standardize in the ICT field. The chapter... Sample PDF
Patent and Antitrust Problems Revisited in the Context of Wireless Networking
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Chapter 10
Knut Blind, Nikolaus Thumm
This chapter presents the first attempt at analyzing the relationship between strategies to protect intellectual property rights and their impact on... Sample PDF
Intellectual Property Protection and Standardization
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Chapter 11
M. H. Sherif
Management of standardization must be part of an overall strategy for knowledge management. This principle is illustrated with the help of a... Sample PDF
Standards for Telecommunication Services
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Chapter 12
Gunnar Ellingsen
Traditionally, uniform and standardized IT-solutions in health care are considered mechanisms for increased control, efficiency and quality.... Sample PDF
Tightrope Walking: Standardization Meets Local Work-Practice in a Hospital
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Chapter 13
Mark Ginsburg
Scientific research is hindered when there are artificial barriers preventing the efficient and straightforward sharing of bibliographic... Sample PDF
Unified Citation Management and Visualization Using Open Standards: The Open Citation System
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Chapter 14
Sangin Park
The standardization issue in the ICT industry is mainly compatibility in the presence of network externalities. The compatibility in Economics... Sample PDF
Standardization and Network Externalities
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Chapter 15
Tim Weitzel, Oliver Wendt, Daniel Beimborn, Daniel Konig
n this chapter, some of the main results of an interdisciplinary research project on standards are presented and integrated into a single framework... Sample PDF
Network Effects and Diffusion Theory: Extending Economic Network Analysis
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Chapter 16
Mark Pruett, Hun Lee, Ji-Ren Lee, Donald O’Neal
This chapter presents a conceptual model of strategic choice for high-technology start-up firms in the face of network externalities—the strength of... Sample PDF
How High-Technology Start-Up Firms May Overcome Direct and Indirect Network Externalities
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Chapter 17
Scott Moseley, Steve Randall, Anthony Wiles
Traditionally, conformance testing has been the domain of the telecommunications industry, while interoperability testing has mainly been limited to... Sample PDF
In Pursuit of Interoperability
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About the Authors