Evolution of Standards and Innovation

Author Name AOKI Reiko  (Faculty Fellow, RIETI) /ARAI Yasuhiro  (Kochi University)
Creation Date/NO. September 2013 13-E-075
Research Project Standard Policy for Innovation
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We present 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 cost. By investing also in technology improvement, both investments make it more difficult for another firm (entrant) to introduce a standard. Our analysis shows that that the incumbent's strategy will differ according to whether the technology is in its infancy or if it has matured, but the existing standard will never be replaced by the entrant. Stability of a standard consortium standard has dynamic benefits in that it prevents replacement by an entrant. The incumbent deters entry when the technology is in its infancy but allows entry and co-existence of two standards when the technology is mature. This implies that dominance of a single standard even for well-established technologies suggests some market power by the incumbent. Our results also indicate that superior technology will never be sufficient to overtake an existing standard.