Evolving Technologies and Standardization

Luis Cabral, New York University, and David Salant, Columbia University

2/19/2008
(Original Publish Date: 1/10/2007)

We consider a model of R&D competition and cooperative standards setting. The quality of each technology design evolves over time as a result of each firm’s R&D expenditure. We argue that standardization — at least early standardization — leads to a free riding problem, and thus to a significant decrease in marginal incentives for R&D investment. For this reason, competing firms, absent a regulatory mandate, may choose incompatible standards. Avoiding a single standard sacrifices short-run network benefits in exchange for faster technology improvement. We provide conditions such that a non-standardization equilibrium is socially optimal.