Collaborative standards development and adoption with network externalities

Abstract

We study industry-based collaborative standard development and adoption by firms in a consortium setting, when the standard is open and free. We present a game-theoretical model that recognizes the fact that 1) firm's decision to develop or adopt is endogenous, e.g. firms only participate in the development if doing so dominates being a passive adopter of the standard or not adopting at all; 2) the standard is jointly developed by all participating firms; 3) the standard adoption has network externalities, i.e. the more firms use the standard, the more valuable it is to all adopters; 4) developing firms have insider benefit based on their involvement in the standardization, which results in lower adoption cost. We find that 1) no firm want to be a passive adopter if there is no benefit of waiting in adoption; 2) when the benefit of waiting is lower than a threshold, there are no passive adopters and 3) developing firm's contribution is not a function of the network externalities.