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Evolution of Standards and Innovation

Author

Listed:
  • Aoki, Reiko
  • Arai, Yasuhiro

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.

Suggested Citation

  • Aoki, Reiko & Arai, Yasuhiro, 2014. "Evolution of Standards and Innovation," CIS Discussion paper series 619, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:cisdps:619
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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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    References listed on IDEAS

    as
    1. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
    2. 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.
    3. Haucap Justus, 2003. "Endogenous Switching Costs and Exclusive Systems Applications," Review of Network Economics, De Gruyter, vol. 2(1), pages 1-7, March.
    4. Cabral, Luís & Salant, David, 2014. "Evolving technologies and standards regulation," International Journal of Industrial Organization, Elsevier, vol. 36(C), pages 48-56.
    5. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
    6. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
    7. Calem, Paul S. & Spulber, Daniel F., 1984. "Multiproduct two part tariffs," International Journal of Industrial Organization, Elsevier, vol. 2(2), pages 105-115, June.
    8. Gans Joshua S & King Stephen Peter, 2001. "Regulating Endogenous Customer Switching Costs," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 1(1), pages 1-31, May.
    9. 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.
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    More about this item

    Keywords

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

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