The Handbook of Technology and Innovation Management

9.4. The Economics and Strategy of Standardization

There are two central problems that focus economists' analysis of standardization. Both arise from analyzing competitive behavior in a standards war between competing alternatives. The first issue concerns whether unfettered market processes choose the efficient 'winner'. Another is that markets may not migrate efficiently between standards, stalling on an inefficient technology. Both of these are related outcomes of the 'lock-in' problem. There are a host of prominent historical episodes in which these questions were important: IBM versus DEC in minicomputers, MS Word versus Word Perfect in word processing, FDDI versus ATM in network communications, and US Robotics versus Rockwell in 56K modems. The VHS/Betamax duel in the VCR markets is another well-known case.

Standards wars also commonly arise as subplots to related larger product market duels. Various banks may belong to incompatible ATM networks, and United Airlines and American Airlines sponsor competing airline reservation systems. If recent experience is any guide, this type of market structure is likely to characterize many, if not most, private economic networks in the future information infrastructure.

In what follows, we discuss the economic literature on standards largely in the context of the lock-in problem. We address the extent to which the factors above (such as direct and indirect network effects, or sunk costs) affect lock-in. Our focus in this section is ...