Estimating the Costs of Standardization: Evidence from the Movie Industry

Abstract

This paper studies the decentralized adoption of a technology standard when network effects are present. If the new standard is incompatible with the current installed base, adoption may be inefficiently delayed. I quantify the magnitude of “excess inertia” in the switch of the movie distribution and exhibition industries from 35mm film to digital. I specify and estimate a dynamic game of digital hardware adoption by theaters and digital movies supply by distributors. Counterfactual simulations establish that excess inertia reduces surplus by 16% relative to the first-best adoption path; network externalities explain 41% of the surplus loss. Targeted adoption subsidies or a mandate on digital distribution help bridge this welfare gap.