MARKET PROCESSES AND THE SELECTION OF STANDARDS

STAN J. LIEBOWITZ, and STEPHEN E MARGOLIS

1/01/2005
(Original Publish Date: 2000)

This paper modifies the received model of standards in several ways that we believe incorporate reasonable characterizations of the production and purchase of goods that embody standards. The model that we develop allows separate consideration of the coordination advantage of standards (which we will call synchronization effects) and the production technology of these goods. The model also represents consumers as responding not only to the stock, or "installed base" of a standard but also to the latest news about the success of a standard. Further, it allows us to consider differences in tastes among consumers. With these departures in modeling come some important results, including these: The expected effect of a "standards externality" is on the amount of the standard-using activity, not on choice of standard or the mix of standards. Where there are differences in preferences regarding alternative standards, coexistence of standards is a likely outcome. Further, a single-standard equilibrium, if it is achieved, is more readily displaced by an alternative if preferences differ. This suggests that product strategies leading to strong allegiances of some customers are likely to be effective in the face of an incumbent standard. Entrenched incumbents are seen as less entrenched within a model that acknowledges that consumers react to new sales, and not just accumulated stocks of goods that embody standards. In particular, a strategy that achieves a significant flow of adoptions for a challenging standard is shown to be viable. This contrasts with previous models in which a significant installed base gives the incumbent standard an insurmountable advantage.