Technical Standards Coalitions for Network Goods
Posted: 20 Jul 1998
Date Written: October 1995
We examine the incentives of firms to form coalitions based on adherence to common technical standards. Many network goods as well as non-network goods with close complements exhibit "network externalities" -- i.e., the value of such goods increases with the size of sales of compatible products. Thus, firms have incentives to be in coalitions of compatible goods that share the same technical "standards." This incentive contrasts with the traditional incentive to differentiate each product and be a dominant player in a particular market "niche." This paper analyzes the interaction of these opposite incentives in the creation of technical standards coalitions. Despite no inherent differences in the features of the products and no cost differences, we find that often at equilibrium the market is highly concentrated with coalitions of widely varying sizes charging very different prices.
JEL Classification: L1, D4
Suggested Citation: Suggested Citation