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Compatibility Standards in Networks

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Network Economics

Part of the book series: Springer Texts in Business and Economics ((STBE))

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Abstract

Compatibility standards have for a long time been of great importance in many areas of the economy. Examples are measures for weights and lengths, languages, the width of rail tracks, voltage, or transmission and switching protocols in telecommunications. Traditionally, setting, enforcing and changing suitable compatibility standards has primarily been the responsibility of engineers and lawyers. Only a few decades ago have economists started to address this problem. In the meantime the economics of compatibility standards is a well-established field in modern industrial economics and network economics.

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Notes

  1. 1.

    In the context of a case study regarding the liberalisation of telecommunication services the lack of an economic theory of compatibility standards has been pointed out in Knieps et al. (1982, p. 213).

  2. 2.

    Early studies on the economics of compatibility standards are Farrell and Saloner (1985), Katz and Shapiro (1985), Kindleberger (1983).

  3. 3.

    Contrary to the traditional assumption of welfare economics that one individual’s utility of consumption is not dependent on the other individuals’ consumption.

  4. 4.

    Cf. e.g. Artle and Averous (1973), Rohlfs (1974), Oren and Smith (1981).

  5. 5.

    Cf. e.g. Katz and Shapiro (1985), as well as Farrell and Saloner (1985, 1986a).

  6. 6.

    Cf. Besen and Saloner (1989), Berg (1989), Kindleberger (1983).

  7. 7.

    This does, however, not preclude the possibility that producers may have incentives to only supply compatible components to the market.

  8. 8.

    For example, SWIFT (Society for Worldwide Interbank Financial Telecommunications) is used by banks. SWIFT is a high-quality service network based on a secure communication standard for the electronic exchange of standardised SWIFT messages (cf. Knieps, 2006a, p. 55). EDIFACT (Electronic Data Interexchange for Administration, Commerce and Transport) is used worldwide by the consumer goods industry. It is a standard for network services applied for structured information of business correspondence (cf. Blankart & Knieps, 1995, p. 293).

  9. 9.

    The extreme case of one standard being accepted by all economic agents is of course not excluded.

  10. 10.

    For reasons of simplification, in the following the set of participants is assumed to be equal to the number of participants.

  11. 11.

    In addition there is the problem of the discrepancy between the private and the social incentives as to what constitutes optimal network size, as well as the problem of network fragmentation (cf. Sect. 6.3.2).

  12. 12.

    In the natural sciences path dependency has long been known as hysteresis. It refers to the dependency of the physical state of an object on the preceding states. For example, when a piece of iron, magnetised to the point of satiation, is degaussed per slow reduction of the field intensity, a residual magnetisation, the so called remanence, remains.

  13. 13.

    It should be noted, however, that these traditional computer programming languages also have undergone significant changes over time, improving their performance characteristics. For the final draft of the Fortran 2008 standard, see Reid (2008). For the COBOL 2002 standard see Oliveira (2006).

  14. 14.

    However, the inefficiency of the QWERTY standard has meanwhile come under debate; it is said that at the time it was at least among the acceptable alternatives (cf. Liebowitz & Margolis, 1990). Even if the QWERTY example has lost its empirical relevance, it serves as a particularly clear illustration of the problems of coordination inherent in introducing new standards.

  15. 15.

    For this cf. Gilbert (1992) as well as Besen and Farrell (1994).

  16. 16.

    For this and similar studies cf. Katz and Shapiro (1994).

  17. 17.

    Cf. Farrell and Saloner (1986a). They also discuss the case of inefficient mobility, where switching occurs too fast, because nobody wants to be left behind alone with the old technology. Considering that there are frequently costs involved in switching to the new technology, this case does not seem directly relevant.

  18. 18.

    Under very specific assumptions (e.g. two consumer groups, two goods) specific results regarding the trade-off between network externalities and variety can be derived (cf. Farrell & Saloner, 1986b).

  19. 19.

    An overview of this theory can be found in Carlton and Perloff (2005, Chap. 7).

  20. 20.

    A detailed analysis of the competition between these two transmission systems can be found in David and Bunn (1988); cf. also Farrell and Saloner (1992, p. 15).

  21. 21.

    However, this result may be reversed if the relevant periods of time are considerably shorter for decisions made within the market process rather than by a committee.

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  1. Institute for Transport Economics and Regional Policy, University of Freiburg, Freiburg, Germany

    Günter Knieps

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Knieps, G. (2015). Compatibility Standards in Networks. In: Network Economics. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-11695-2_6

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