Developing a Theoretical Model

1. Existing Theories

In the research on technology standardization, three main theories or approaches have been employed. Early studies used economic theories such as economies of scale and network externalities to identify economic factors that promote standardization (e.g. David and Steinmueller, 1994; Katz and Shapiro, 1985; Liebowitz and Margolis, 1994). Since then, some researchers have adopted Game Theory to analyze organizations’ strategic approaches to setting standards (e.g. Besen and Farrell, 1994; Chiesa and Toletti, 2003). Other researchers have used the model of Actor Network Theory, or ANT, to describe and interpret the involvement and interaction of the many actors in the actual process of technology standardization (e.g. Graham et al., 1995; Hanseth et al., 2006; Markus et al., 2006).

Economic theories such as economies of scale and network externality have been adopted widely to identify economic factors in standardization. These theories help to clarify the economic impact of standardization from the perspective of the entire industry. From the perspective of an individual organization, however, the challenge is to figure out its strategy to influence the economic factors and to shape the industry standards to its own benefit.

Researchers have suggested one way to stimulate economic factors by identifying different types of standard-setting processes according to whether organizations collaborate with others in a formal or informal way (e.g. Besen and Farrell, 1994; Chiesa and Toletti, 2003). The basic theory used for modeling these types of standard-setting processes and the strategic decisions involved is Game Theory. The theory of games, developed by mathematician John von Neumann and economist Oskar Morgenstern as a strain of applied mathematics and economics, has been used by researchers to study various competitive and co-operative situations where actors strive to pursue strategies that would maximize their payoffs (Von Neumann and Morgenstern, 1953).

Game theory studies on standards contribute to our understanding through the identification of the different types of collaborations and standard-setting processes or collaborations, and through their analysis of the relationship between an organization’s situation (for example, its market position) and its circumscribed choice of standard-setting processes. However, these game theory models make drastic simplifying assumptions about the structure and process of technology standardization. For example, many models assume that there are only two competing organizations and that they have similar market and technology positions. As a result of this simplifying approach to modeling, the kind of standards strategies considered in the model is restricted to the making of the simple decision on choosing this or that standard process, and this or that form of collaboration.

In a practical business environment, the topology of the standard setting game is rather convoluted. First of all, there are usually a lot more than two competing companies. Each of the various types of players—users, vendors, technologists, regulators, etc.—push their own agendas and hedge their bets by forming multiple alliances and coalitions. Third, the form and process that the industry ultimately elects to settle technology standards are determined endogenously through the actual playing of the standard-setting games (and not exogenously given as strategic choices). All in all, we need a richer framework of analysis in order to account for the “topology” of technology configuration, value network, and distribution of IPR so that one might actually understand how order (i.e. an agreed standard) emerges out of chaos of the conflicting interests and the competing maneuvers of the many players.