Standardization, Compatibility, and Innovation

Joseph Farrell and Garth Saloner “Standardization, Compatibility, and Innovation," The RAND Journal of Economics,Vol. 16, No. 1 (Spring, 1985), pp. 70-83. 提供的 [PDF]

Notes by Yi-Nung

這篇是最早有關 network externalities 的論文之一

excess inertia :

new technology is not adopted but is efficient

excess momentum (called insufficient friction by Katz and Shapiro, 1992):

new technology is adopted but is inefficient




Katz and Shapiro (1985) present an oligopoly model to show that there is a tendency to too little standardization. However, this is because failure to  standardize has no social benefits without specifying explicit cost to standardization in their model (Farrell and Saloner, 1986b, EL).


original Abstract:

There are often benefits to consumers and to firms from standardization of a product. We examine whether these standardization benefits can “trap" an industry in an obsolete or inferior standard when there is a better alternative available. With complete information and identical preferences among firms the answer is no; but when information is incomplete this “excess inertia" can occur. We also discuss the extent to which the problem can be overcome by communication.

Cited by

Nicholas Economides (1996) “The economics of networks,"International Journal of Industrial Organization, Volume 14, Issue 6, October 1996, Pages 673–699.

Farrell and Saloner (1985) discuss a two-period model where consumers have varying willingness to pay for the change of the technology, measured by theta. Users can switch in period 1 or 2, and switching is irreversible. Users fall in four categories according to the strategy they pick: (i) they never switch, whatever the behavior of others in the first period; (ii) they switch in period 2 if other users have switched in period 1 — jumping on the bandwagon; (iii) they switch in period 1; (iv) switch in period 2 even if others have not switched in period 1. The last strategy is dominated by strategy (iii). Consumers of low theta use strategy (i), consumers of intermediate theta use strategy (ii), and consumers of high theta use strategy (iii). Consumers would like to coordinate themselves and switch in the first period (thereby getting the bandwagon rolling) but are unable to do so, thus creating excess inertia.34 This inertia can be reduced 34 See Katz and Shapiro (1992) for a different view arguing for excess momentum (which they call insufficient friction).



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