Conclusions and further research

Abstract

Standardization problems are eminent in many areas. Especially in the context of information systems, the need for compatibility produces coordination problems. Network effect theory has emerged in recent years to explain the mechanisms behind standardization problems. Positive network effects as the underlying principle in communication networks describe interdependencies between agents in communication networks (e.g. intranet, electronic market place) as positive correlation between the utility derived from a good and the number of its users. Its general findings have been presented in section 2.2:

• In many cases, the existence of network effects leads to Pareto-inferior results in markets (i.e. unfavorable outcomes of decentralized standardization processes).

• Particularly, excess inertia can occur as no actor is willing to bear the overproportional risk of being the first adopter of a standard; thus, startup problems prevent adoption even of superior products (lock-in, stranding). Also, excess momentum can occur, e.g. if a sponsoring firm uses low prices in early periods of diffusion to attract a critical mass of adopters.

• Positive network effects imply multiple equilibria and the (tippy) market will finally lock-in to a monopoly situation.

“When I’m working on a problem, I never think about beauty. I think only how to solve the problem. But when I have finished, if the solution is not beautiful, I know it is wrong.” Buckminster Fuller