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Evolution of Standards and Innovation

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  • Aoki, Reiko
  • Arai, Yasuhiro
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    Abstract

    We develop a framework to examine how a standard evolves when a standard consortium or firm (incumbent) innovates either to improve the standard or to strengthen the installed base, which increases switching costs. Both investments make it more difficult for another firm (entrant) to introduce a standard by investing in technology improvement. Our analysis shows that that incumbent’s strategy depends on whether the technology is in its infancy or has matured, and that entrants cannot supplant the existing standard. A standard consortium brings dynamic benefits by preventing replacement by an entrant. When the technology is in its infancy, the incumbent deters entry, but when the technology is mature, entry and the coexistence of two standards are tolerated. The dominance of a single standard, even for well-established technologies, suggests that incumbents have market power. Our results also suggest that having superior technology is not enough to enable entrants to supplant an existing standard.

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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/26486/1/DP619.pdf
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    Bibliographic Info

    Paper provided by Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University in its series CIS Discussion paper series with number 619.

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    Length: 38 p.
    Date of creation: Mar 2014
    Date of revision:
    Handle: RePEc:hit:cisdps:619

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    Related research

    Keywords: standards; innovation; technology; upgrades; standardization; replacement effect;

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    1. Caminal, Ramon & Matutes, Carmen, 1990. "Endogenous switching costs in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 8(3), pages 353-373, September.
    2. Calem, Paul S. & Spulber, Daniel F., 1984. "Multiproduct two part tariffs," International Journal of Industrial Organization, Elsevier, vol. 2(2), pages 105-115, June.
    3. Drew Fudenberg & Jean Tirole, 1999. "Customer Poaching and Brand Switching," Harvard Institute of Economic Research Working Papers 1871, Harvard - Institute of Economic Research.
    4. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
    5. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
    6. Haucap Justus, 2003. "Endogenous Switching Costs and Exclusive Systems Applications," Review of Network Economics, De Gruyter, vol. 2(1), pages 1-7, March.
    7. Aoki, Reiko & Small, John, 2010. "The Economics of Number Portability: Switching Costs and Two-Part Tariffs," PIE/CIS Discussion Paper 483, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    8. Luis Cabral & David Salant, 2008. "Evolving Technologies and Standards Regulation," Working Papers 08-16, New York University, Leonard N. Stern School of Business, Department of Economics.
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