MONOPOLY POWER IN STANDARDS IS A MYTH

Nitin Aggarwal, Rawls College of Business Administration, Texas Tech University, and Eric A Walden, Rawls College of Business Administration, Texas Tech University

1/01/2005
(Original Publish Date: 2003)

This paper explores the optimal organization of an industry of manufacturers who require standards to make their products function. We apply concepts found in neo-classical economics and concepts from increasing returns in order to show that IT standards, in particular, are natural monopolies. We further illustrate that once the manufacturers of IT intensive products realize that a monopolistically supplied standard will be more costly than a competitive standard, they will organize to mitigate the monopolistic supply problem. Specifically, we propose that they engage in a strategy of coopetition, wherein manufacturers that compete in the final goods market, cooperate in developing standards as a provision of inputs. This means that, as an industry, manufacturers can gain the advantages of a single supplier, while mitigating the costs of monopolistic supply, by jointly owning the standard authority. We illustrate this idea with the market dynamics of the DVD standard.