Evolution of Standards and Innovation
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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