Economics of compatibility standards and competition in telecommunication networks

Paul A. David, and W. Edward Steinmueller

8/29/2005
(Original Publish Date: 1994)

The pro- and anti-competitive implications of technical compatibility standards are introduced in general terms and then applied to current issues in telecommunications policy. The demand and supply for standards under regulated monopoly and the transition to deregulation and competitive entry create a tradeoff between the traditional goal of achieving positive externalities from interconnection and the alternative goal of providing enhanced service offerings that may involve sacrificing universal connectivity. We argue that this tradeoff has affected the utilization of data communication networks in the U.S. and Europe. In addition, we identify problems of competing interests that complicate the European approach to standards "harmonization" in the case of telecommunications. We conclude by noting that the nature of standards and standard-setting process can have marked effects on the incentives to conduct private research and development.