Standard-Creating Coalitions in Oligopoly with Differentiated Products and Variable Network Density

Abstract

This paper considers the problem of standard-creating coalition formation in an oligopoly. Cooperative R&D investments with the aim to improve product quality are explicitly taken into account.

We obtain the following results. If both the strength of network effects and the degree of product substitutability are weak, no stable standard coalition is feasible and it is also socially optimal not to create a standard. However, with strong network effects and product substitutability the grand coalition is the stable equilibrium, which is also socially optimal. In between these limits a multiple-standards coalition structure can be a stable equilibrium, although from a welfare perspective it would be best to create one common standard.

If a stable equilibrium contains multiple standards, the firms invest more in R&D than in the case of the grand coalition. It is shown that competition among standards stimulates quality improving innovation.

Keywords: Standards, Coalition creation, R&D

JEL Classification: C72, D21, O31