Compatibility Standards, Competition, and Innovation in the Broadcasting Industry

This study surveys the theoretical literature dealing with the economics of compatibility standard setting and, using that literature as an analytic framework, it investigates a number of cases of standard setting in the broadcasting industry. These cases include both point-to-multipoint services (e.g. broadcast television) and point-to-point services (e.g. cellular radio). The goal is a better understanding of (1) the conditions under which compatibility standards are likely to be established through market forces, (2) the role that government agencies should play in mandating standards or in other ways encouraging standard setting, and (3) the conditions under which compatibility among technologies is economically efficient. Among its conclusions are that formal standard setting, either by government or private bodies, may be especially important where users lack knowledge of the preferences of others and where no technology is clearly preferred, and that mandatory standard setting should be avoided during the times when the technologies in question are rapidly changing. In addition, the justification for mandatory standards is weakest in cases where a particular technology has widely varying uses.