3.2.5 Coordination to Technical Standards with Asymmetric Technologies
So far it was assumed that the cost of standardization was fixed and the same for both firms. If standardization costs are different, firms play a standard coordination game. A 2X2 version of this game is presented below. Entries represent profits.
In this game, we will assume that firm i has higher profits when "its" standard i get adopted, a > g, b < h. Profits, in case of disagreement, will depend on the particulars of the industry. One standard assumption that captures many industries is that in case of disagreement profits will be lower than those of either standard, e, c < g; d, f < b. Under these circumstances, the setting of either standard will constitute a non-cooperative equilibrium.19 There is no guarantee that the highest joint profit standard will be adopted. Since consumers surplus does not appear in the matrix, there is no guarantee of maximization of social welfare at equilibrium. For an analysis with continuous choice of standard specification see Berg (1988).
Back to Outline