Standard-Creating Coalitions: Open vs. Proprietary Standards (original) (raw)

Standards Coalitions Formation and Market Structure in Network Industries

We discuss the formation of technical standards platforms in industries with network externalities where firms are free to choose their degree of technical compatibility with competitors. In our model, firms choose affiliation to a technical standards coalition in the first stage of a game, and play an oligopoly game in the second stage. In adding itself to a technical standards coalition, a firm benefits from the network effects of the whole coalition, but also faces increased competition in the output market from other firms in the coalition. Also, the increase of the size of the coalition changes the competitive position of members of that coalition relative to other firms. We find that the extent and size of coalitions at equilibrium depends crucially on the degree of the intensity of network effects. When network effects are very strong, full compatibility prevails. When externalities are slightly weaker, two standards coalitions are formed, a singleton, and one with all remaining firms. On the other extreme, for very weak network effects, the equilibrium is total incompatibility, and for slightly more intense network effects, coalitions are of small size. We characterize a number of other equilibria for intermediate strengths of network externalities.

Technology Choice and Coalition Formation in Standards Wars

Journal of Industrial Economics, 2020

We study the efficiency of the standard-setting process when standards result from competition between groups of firms sponsoring different technologies. We show that ex ante agreements may decrease welfare in the case of standards wars: Even though industry profits are larger with ex ante agreements, welfare is not necessarily larger, because the interests of firms and society may not be aligned. This result contrasts with the findings of previous works studying de jure monopoly standards. Including adopters in the standard-setting process may restore the efficiency of ex ante agreements. I. INTRODUCTION TechnicaL standards-such as the comPact disk or the protocols that run the internet-are essential for the development and adoption of new technologies. Standards often result from competition between groups of firms sponsoring different technologies.

Collective Innovation in a Standard Setting Context

We develop a model of collective innovation for the repeated updating of a technology standard. We characterize equilibria in an open or consortium standard and proprietary standard environments. We highlight a possible free riding problem due to the public goods nature of the open standard. This implies a larger number of …rms in a standard may have an adverse e¤ect on investment. However this e¤ect may be balanced and even o¤set by positive network e¤ects of larger participation. Turning as a second step to a proprietary standard, we show that introducing greater reward to a …rm among the SOS members that provides the critical improvement also can overcome the free riding problem. We derive the rule for setting optimal rewards.

Duopoly compatibility standards with partial cooperation and standards leadership

Information Economics and Policy, 1988

This paper presents a model of duopolists producing differentiated substitutes. Greater compatibility between the products causes each to have a greater demand. However, each firm has a most desired location in the product space (a most preferred technical standard); deviation from that standard in the direction of the rival's standard increases compatibility, but is costly. This paper presents the equilibrium outcomes for two products under Cournot rivalry, multiproduct monopoly, second-best standards-specification, and welfare maximization. The outcome associated with partial cooperation is examined. Then the Stackelberg model is used to derive the equilibrium conditions for output leadership and technical standards leadership. This model of technological externalities allows us to compare and evaluate different standards-specification processes.

R&D Incentives, Compatibility and Network Externalities

SSRN Electronic Journal, 2006

An industry exhibits network externalities when the benefit that consumers enjoy from purchasing one or several of its goods depends on the number of other consumers that use the same and/or compatible products. For the firms in those sectors (e.g. telecommunications, consumer electronics, operating systems, etc.), the presence of network externalities implies that the attractiveness of their products is a function of their quality-adjusted prices and the potential benefit attached to their expected network sizes. Several studies have shown how pricing considerations, as well as compatibility, entry and investment decisions are affected by the presence of network externalities. Moreover, due to the presence of these externalities, firms in network industries might even follow very different rules from those observed in traditional industries. While the producer of a new product in a conventional industry tends to place it on the market early, to differentiate the good as much as possible, to protect it from imitation and to charge high prices, successful producers of network goods have often done the opposite. This paper analyzes how network externalities influence industry Research and Development (R&D) incentives when two network technologies compete. The paper focuses on the levels of R&D investments, the social efficiency of those efforts and the role of networks' compatibility. The paper presents four main results. First, for low cost of innovation entry does not occur at all and for high cost of innovation, entry occurs with positive probability. Low cost of innovation implies that through investments the incumbent firm is able to preempt the entrant. Second, when entry is possible, the incumbent invests always more than the entrant and, therefore, there is a high probability that the incumbent maintains its monopoly position. This result implies that, even though the incumbent has an advantage to keep monopolizing the market, he is forced to innovate given the threat of entry. Third, from a welfare perspective, the incumbent invests too little and the entrant invests too much given the existence of locked-in consumers. These results are solely due to the presence of network externalities. Fourth, by choosing to produce compatible products, firms do not necessarily reduce the R&D competition intensity as has been suggested in the literature.

Markets with network externalities: non-cooperation vs.Cooperation in R&D

2006

This paper examines three strategies for R&D investments in oligopoly markets with network externalities. The Cell project of the Sony-Toshiba-IBM R&D joint venture motivates our analysis and presentation. In addition to the particular characteristics that apply to the Cell project, we develop formal economic explanations for observed R&D investment strategies in markets with network externalities. Our analytical model suggests that the degree of product compatibility, initial market shares, and the intensity of the product-market competition are instrumental to the R&D strategy in these markets. The paper ties together the literature on information technologies, strategy, and economics, and derives optimal patterns of strategic behavior in the R&D (pre-production) stage in oligopoly markets with network externalities.

Cooperative and Noncooperative R&D in Two-Sided Markets

SSRN Electronic Journal, 2000

In this paper, we analyze the impact of cooperation on R&D investments in a two-sided market, where platforms compete in quantities. We show that if indirect externalities are of a moderate magnitude, the threshold degree of spillovers above which cooperation spurs R&D investments and enhances social welfare increases with the degree of externalities. If indirect externalities are of a strong magnitude, cooperation can also be bene…cial in terms of welfare for low degrees of spillovers.

Coalition formation in standard-setting alliances

1995

W A 7 e present a theory for predicting how business firms form alliances to develop and sponsor technical standards. Our basic assumptions are that the utility of a firm for joining a particular standard-setting alliance increases with the size of the alliance and decreases with the presence of rivals in the alliance, especially close rivals. The predicted alliance configurations are simply the Nash equilibria, i.e., those sets of alliances for which no single firm has an incentive to switch to another alliance. We illustrate our theory by estimating the choices of nine computer companies to join one of two alliances sponsoring competing Unix operating system standards in 1988. (Standardization; Alliance; Computer Industry; Unix)

Conflict and Cooperation on R&D Markets

2003

We investigate the distribution of profits between a laboratory and two firms on the intermediate market for cost-reducing or/and demand-enhancing technology, and infer implications for the governance of R&D. The laboratory supplies tailor-made multi-dimensional R&D services at some costs, and maximizes its individual profits. Firms are interested in delegating the production of R&D services from a common laboratory, to whom they offer contingent payment offers. On the final market for goods, firms compete in prices or in quantities. We unveil mild sufficient conditions for the (non) appropriation of innovation profits by the laboratory. Anti-complementarities in the dimensions of R&D services imply that the laboratory appropriates some non-zero share of joint profits in all equilibria. In this case, we show that each firm has strategic incentives to shift to a more integrated structure by merging horizontally or by acquiring the laboratory. Complementarities in the development dimensions imply that the laboratory exactly breaks even in all equilibria. In that case, firms have no incentive to shift to a more integrated governance structure. A series of specific algebraic forms, as borrowed from the literature, illustrate the broad applicability of the results, and uncovers common features in seemingly unrelated representations of postinnovation cost and demand conditions. JEL classification: C72; L13; O31.