Evolving Technologies and Standards Regulation

Abstract

The EU mandated a single standard for second generation wireless telecommunications, whereas the US allowed several incompatible standards to battle for market share. Motivated by this example, we argue that a single standard leads to a free riding problem, and thus to a significant decrease in marginal incentives for R&D investment. In this context, keeping two separate standards may be a necessary evil to sustain a high level of R&D expenditures. We also provide conditions such that a non-standardization equilibrium is better for consumers and for society as a whole.

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Reference

Luis Cabral, and David Salant, “Evolving Technologies and Standards Regulation”, International Journal of Industrial Organization, vol. 36, September 2014, pp. 48–56.