Abstract

During the 1980s, economists developed the concept of positive network effects and switching costs as the key dynamics of de facto standards competition. They concluded that a positive feedback loop usually “tips” a market to the standard with the most users and complementary assets. While recent scholars have acknowledged that not all markets tip, and suggested some possible limitations on this phenomena, these limitations have not been integrated systematically into a model for competition in these industries. Using examples drawn from the standards contests of the past 20 years, this case study develops an integrated model for competition in these industries.

Introduction

The development, sale, and adoption of important products are enabled by compatibility standards. These standards create value by either allowing interconnectivity directly between products or facilitating the provision of complementary assets (Katz and Shapiro, 1986; Grindley, 1995; Shapiro and Varian, 1999). While the standards in some markets are determined via de jure or quasi-governmental mechanisms, e.g. the FCC selecting RCA’s color TV broadcast standard, in many industries over the last 25 years the standards that emerged have been de facto compatibility standards, sponsored either by individual firms or alliances of multiple firms. These are what have captured the most attention and a model of network effects, termed the ‘‘hardware-software paradigm,’’ has become the dominant way of thinking about standards competition (Shapiro and Varian, 1999). This model is usually applied as an ‘‘overlay’’ to traditional strategic and technology models of competition.