Coordination Through Committees and Markets

Joseph Farrell, Department of Economics, UC Berkeley, and Garth Saloner, Department of Economics, UC Berkeley

9/02/2015
(Original Publish Date: 1/11/1988)

We discuss three common mechanisms for achieving coordination, with particular reference to the choice of compatibility standards. The first involves explicit communication and negotiation before irrevocable choices are made: it represents what standardization committees do. The second mechanism, by contrast, involves no explicit communication and depends on unilateral irrevocable choices: it succeeds if one agent chooses first and the other(s) follow(s). This is a simple version of "market leadership." We analyze these two mechanisms in a simple model and show that the committee is more likely to achieve coordination. Moreover, although the committee is slower, it outperforms the market mechanism, even when we allow for the value of speed. Third, we examine a hybrid of the first two mechanisms, in which both communication and unilateral preemptive actions are allowed. We show that, far from worsening its performance, unilateral actions improve the committee system. This hybrid system more closely resembles the committee system, the more important coordination is relative to conflict.