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Choosing How to Compete: Strategies and Tactics in Standardization

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  • Stanley M. Besen
  • Joseph Farrell

Abstract

In a network industry, each firm must decide whether or not it wants its product to be compatible with those of rivals. This horizontal compatibility strategy determines whether competition is a battle to establish a standard or the more conventional competition within a standard. The two forms of competition involve different tactics and may differ in the extent to which they dissipate industry profits. In some cases, all firms in an industry may prefer the same form of competition. In other cases, firms may prefer different forms of competition and either may prevail.

Suggested Citation

  • Stanley M. Besen & Joseph Farrell, 1994. "Choosing How to Compete: Strategies and Tactics in Standardization," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 117-131, Spring.
  • Handle: RePEc:aea:jecper:v:8:y:1994:i:2:p:117-31 Note: DOI: 10.1257/jep.8.2.117
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    References listed on IDEAS

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    1. Bardhan, Pranab, 1987. "Alternative Approaches to the Theory of Institutions in Economic Development," Department of Economics, Working Paper Series qt4t97z6v6, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    2. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, pages 70-83.
    3. Farrell, Joseph & Shapiro, Carl, 1989. "Optimal Contracts with Lock-In," American Economic Review, American Economic Association, pages 51-68.
    4. Paul Krugman, 1991. "History versus Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 651-667.
    5. Joseph Farrell & Nancy T. Gallini, 1988. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," The Quarterly Journal of Economics, Oxford University Press, pages 673-694.
    6. David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, pages 332-337.
    7. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
    8. Michael A. Einhorn, 1992. "Mix and Match Compatibility with Vertical Product Dimensions," RAND Journal of Economics, The RAND Corporation, pages 535-547.
    9. Martin Shubik, 1971. "The Dollar Auction game: a paradox in noncooperative behavior and escalation," Journal of Conflict Resolution, Peace Science Society (International), pages 109-111.
    10. Liebowitz, S J & Margolis, Stephen E, 1990. "The Fable of the Keys," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 1-25, April.
    11. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
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    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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