An Integrated Model of Consortium-Based E-Business Standardization: Collaborative Development and Adoption with Network Externalities

Kexin Zhao, Ph.D. Candidate in the College of Business at the University of Illinois at Urbana-Champaign., Mu Xia, Assistant Professor of Management Information Systems in the College, and Michael Shaw, Hoeft Endowed Chair in Information Technology Management and Director of the Center for Information Systems and Technology Management and Director of the Center for Information Systems and Technology Management at the University of Illinois at Urbana-Champaign.

12/26/2007
(Original Publish Date: 2007)

ABSTRACT: E-business standards are critical for electronic interorganizational transactions. In many industries, firms develop e-business standards collaboratively in a standard consortium. They can choose to become a leading developer, a passive adopter, or a nonadopter. To capture firms’ strategic choices at the development stage and the adoption stage, which are related due to the double-sided interactions between the two stages, we propose an integrated model of consortium-based e-business standardization. We find that firms’ payoffs from standard adoption increase with the intrinsic value of the standard, but developers’ benefits increase faster than passive adopters’ benefits. The model examines the value of passive adopters to the standard development via network externalities, even though passive adopters do not contribute directly in the consortium. We find that passive adopters do not always exist. There are two possible equilibria for the endogenous formation of the developer network and the adopter network, one without passive adopters and one with passive adopters. How external conditions affect the endogenous formation of the consortium depends upon whether there are passive adopters in the equilibrium. Based on our analysis, we recommend strategies to e-business standard consortia to motivate firms’ participation and enhance social welfare created by the standard.