Technological standards, business strategies and public policy

Technological standards and product standardization today are subjects of active policy concern in business and government. Standards have a significant bearing upon both the development and the diffusion of new technologies and products, and the process of technological innovation obviously exerts a powerful force upon the structure of markets and the performance of industries. So it is not surprising that issues concerning ‘standards’, although once quite neglected, have emerged since the mid-1970s as a focus of analytical and empirical attention among economists, especially among those preoccupied with the economics of industrial organization and international competition (see Hemenway 1975, Kindleberger 1983, LeCraw 1984, and Farrell and Saloner 1985b for recent surveys).

The direction of inventive activity itself has to be assigned some of the responsibility for this intellectual re-awakening. Modern advances in microelectronics and microwave, laser and fibre optics technology have given heightened prominence to economic and political issues posed by network externalities and system scale economies in the encoding, processing, and transmission of information. Compatibility and standard-setting have arisen lately as central questions in the development and marketing of computer operating systems and software, commercial data or ‘value added’ networks (e.g., TELENET and TYMNET), local area networks (LANs), cellular radio-telephones, and ‘smart cards’ for electronic funds transfer. While these are a source of new economic opportunities, they have also created new and difficult problems of strategy for corporate managers and public policy-makers alike.