Third-party Provision of Conversion Technologies in Network Markets

Arnaud Varé, Ralf Seifert

Abstract


In network markets, the provision of third-party converters is an important dimension of standards wars. In this paper, we develop a mathematical model to analyze the effects of third-party converter introduction on the adoption process of incumbents’ base technologies and discuss managerial insights based on our model. We determine converter introduction strategies of third parties by establishing under what circumstances third parties may maximize their profit. We find that there exists an optimal introduction time for converters, which depends on a trade-off between conversion option and consumers’ memory effect. The preferred conversion option is mostly two-way conversion. As a result of converter provision, converter introduction affects the de facto standardization process of the incumbents’ base technologies by accelerating the lock-in process of the dominant technology. We then discuss how incumbents can anticipate and react to third-party converter introduction in order to reduce the third parties’ incentive to introduce converters. Throughout the paper, we illustrate our analytical results with numerical examples.

Keywords


converter; de facto standardization process; network externality; standards war; tactics; technology adoption; third party.

Full Text:

PDF [en]

References


ANDREOZZI, L. (2004) A Note on Critical Masses, Network Externalities and Converters. International Journal of Industrial Organization, 22(5), 647-653.

BESEN, S.M., Farrell, J. (1994) Choosing How to Compete: Strategies and Tactics in Standardization. Journal of Economic Perspectives, 8(2), 117-134.

BLIND, K. (2004) The Economics of Standards: Theory, Evidence, Policy. Cheltenham, UK: Edward Elgar Publishing.

BRAUNSTEIN, Y.M., White, L.J. (1985) Setting Technical Compatibility Standards: An Economic Analysis. Antitrust Bulletin, 30(2), 337-356.

CHOI, J.P. (1996) Do Converters Facilitate the Transition to a New Incompatible Technology? A Dynamic Analysis of Converters. International Journal of Industrial Organization, 14(6), 825-835.

CHOI, J.P. (1997) The Provision of (Two-Way) Converters in the Transition Process to a New Incompatible Technology. Journal of Industrial Economics, 45(2), 139-153.

CHOU, C.F., Shy, O. (1990) Network Effects Without Network Externalities. International Journal of Industrial Organization, 8(2), 259-270.

CHURCH, J., Gandal, N. (1993) Complementary Network Externalities and Technological Adoption. International Journal of Industrial Organization, 11(2), 239-260.

CHURCH, J., Gandal, N. (1996) Strategic Entry Deterrence: Complementary Products as Installed Base. European Journal of Political Economy, 12(2), 331-354.

DAVID, P.A. (1987) Some New Standards for the Economics of Standardization in the Information Age. In P. Dasgupta and P.L. Stoneman (Eds.) Economic Policy and Technological Performance, Cambridge, UK: Cambridge University Press.

DAVID, P.A., Bunn, J.A. (1988) The Economics of Gateway Technologies and Network Evolution: Lessons from Electricity Supply History. Information Economics and Policy, 3(2), 165-202.

DAVID, P.A., Greenstein, S. (1990) The Economics of Compatibility Standards: An Introduction to Recent Research. Economics of Innovation and New Technology, 1(1), 3-41.

DE VRIES, H.J., Hendrikse, G.W.J. (2001) The Dutch Banking Chipcard Game: Understanding a Battle Between Two Standards. International Studies of Management and Organization, 31(1), 106-125.

ECONOMIDES, N. (1988) Variable Compatibility Without Network Externalities. Stanford University, Stanford, CA.

ECONOMIDES, N., Viard, V.B. (2007) Pricing of Complements and Network Effects. NET Institute.

EHRHARDT, M. (2004) Network Effects, Standardisation and Competitive Strategy: How Companies Influence the Emergence of Dominant Designs. International Journal of Technology Management, 27(2/3), 272-294.

FARRELL, J., Saloner, G. (1986) Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation. American Economic Review, 76(5), 940-955.

FARRELL, J., Saloner, G. (1987) Competition, Compatibility and Standards: The Economics of Horses, Penguins and Lemmings. In H.L. Gabel (Ed.) Product Standardization and Competitive Strategy, Amsterdam; New York; Oxford; Tokyo: North-Holland.

FARRELL, J., Saloner, G. (1992) Converters, Compatibility, and the Control of Interfaces. Journal of Industrial Economics, 40(1), 9-35.

GABEL, H.L. (1987) Product Standards and Competitive Strategy: An Analysis of the Principles. INSEAD, Fontainebleau, France.

GALLAGHER, S., Park, S.H. (2002) Innovation and Competition in Standard-Based Industries: A Historical Analysis of the U.S. Home Video Game Market. IEEE Transactions on Engineering Management, 49(1), 67-82.

GANDAL, N., Greenstein, S., Salant, D. (1999) Adoptions and Orphans in the Early Microcomputer Market. Journal of Industrial Economics, 47(1), 87-103.

HILL, C.W.L. (1997) Establishing a Standard: Competitive Strategy and Technological Standard in Winner-Take-All Industries. Academy of Management Executive, 11(2), 7-25.

HOTELLING, H. (1929) Stability in Competition. Economic Journal, 39(153), 41-57.

IHLWAN, M. (2007) LG: Bridging the Digital Disc Divide. BusinessWeek, January 5.

KANELLOS, M. (2006a) A DVD Combo? Don't Hold Your Breath. CNET News, April 11.

KANELLOS, M. (2006b) Blu-ray/HD DVD Combo Still on Ice. CNET News, September 21.

KATZ, M.L., Shapiro, C. (1994) Systems Competition and Network Effects. Journal of Economic Perspectives, 8(2), 93-115.

LANCASTER, K. (1979) Variety, Equity, and Efficiency. New York, NY: Columbia University Press.

LEVINE, R. (2006) Unlocking the iPod. Fortune, October 23.

LITTLE, J.D., Lodish, L.M. (1969) A Media Planning Calculus. Operations Research, 17(January-February), 1-35.

LOMBARDI, C. (2006) Zune Details Unzipped. CNET News, September 29.

MACKIE-MASON, J.K., Netz, J.S. (2006) Manipulating Interface Standards As An Anti-Competitive Strategy. In S. Greenstein and V. Stango (Eds.) Standards and Public Policy, Cambridge, UK: Cambridge University Press.

MANENTI, F.M., Somma, E. (2008) One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries. International Journal of the Economics of Business, 15(3), 301-322.

REIMER, J. (2005) Total Share: 30 Years of Personal Computer Market Share Figures. Ars Technica, http://arstechnica.com/articles/culture/total-share.ars (accessed in December 14)

RYST, S. (2006) Linux Linkup for Microsoft, Novell. BusinessWeek, November 3.

SEIFERT, R.W., Varé, A.X. (2009) Adoption of Network Technologies in the Presence of Converters. Economics of Innovation and New Technology, 18(1), 69-91.

SHAPIRO, C., Varian, H.R. (1999a) Information Rules: A Strategic Guide to the Network Economy. Boston, MA: Harvard Business School Press.

SHAPIRO, C., Varian, H.R. (1999b) The Art of Standards Wars. California Management Review, 41(2), 8-32.

SIKLOS, R. (2007) New Disc May Sway DVD Wars. CNET News, January 4.

SWANN, G.M.P. (2000) The Economics of Standardization. University of Manchester, Manchester, UK.

VARÉ, A.X., Seifert, R.W. (2008) Contextual And Tactical Changes in Standards Wars: What Consequences For Winners? International Journal of Innovation and Technology Management, 5(4), 447-474.

VIARD, V.B., Fan, S. (2005) The Long Battle for an Instant Messaging Standard, Case study, Stanford University, Stanford, CA.




DOI: http://dx.doi.org/10.4067/S0718-27242009000200001



Copyright (c)



2017 © Universidad Alberto Hurtado - Facultad de Economía y Negocios. 
Erasmo Escala 1835 - Santiago, Chile.
Economic Analysis Review | Observatorio Económico | Gestión y Tendencias