Economics of Technical Compatibility Standards Yale Braunstein

Background - 1  Consumers desire to consume a “portfolio” from a repertory independent of format  What about specialization in consumption?  (Relatively) high cost of conversion  (Relatively) high cost to have multiple “players”  (Relatively) high cost to have duplicate sets of content

Background - 2  This is more than the typical Chamberlain problem  Lack of economies of scale in production  (Possible digression on guns & bullets)  Compatibility problems can be on one or more of several levels  Example: voltage, physical connectors for plugs & outlets; AC current frequency, etc.  Both private & social costs & benefits  Compatibility is not costless; social costs may include costs of foregoing options (stifling innovation)

A few examples  Users wish to connect peripheral devices to computers  Viewers/listeners prefer to receive all broadcast programming  Users wish to use pre-recoded media as well as make their own recordings  Shippers prefer to have freight stay in one car or container  Digression on RR gauges

ISO OSI 7-layer model 7.) Application 6.) Presentation 5.) Session 4.) Transport 3.) Network 2.) Data Link 1.) Physical

Approaches to compatibility  National & international standards bodies  ITU, ETSI, ANSI, …  Directed vs. undirected  National industrial policy  Leave it to the market  Compulsory licensing  Require open standards  Ethernet as a case study

More on social gains & losses  Gains  Reduction in “translation” costs, duplicate equipment, duplicate repertories, etc.  Losses  Loss of technologies with unique properties or highly valued by a few  Premature scrapping of no-longer compatible equipment  Barriers to entry  Timing  Premature decisions forcing compatibility may lead to “wrong” choices  But, the longer you wait, the greater the “lost” investment

Positive models  Importance of “specialized” vs. “portfolio” consumers  Importance of “locus” of decision making  Equipment manufacturers  Broadcasters  Etc.

Antitrust & regulatory issues  Be suspicious of arrangements that are collusive or increase barriers to entry  Vertical integration may be socially useful  Regulate to avoid negative externatities