We examine the effectiveness of public policy in a context of competing standards with network externalities. We show that, if the policymaker is very impatient, then it is optimal to support the leading standard; whereas, if the policymaker is very patient, then it is optimal to support the lagging standard. We also consider the timing for optimal intervention and provide sufficient conditions under which it is optimal to delay or not to delay intervention.
Keywords: standards, network externalities, public policy.
JEL Code Nos.: L13, L51, O33
VHS vs. Betamax VCRs; Apple MacIntosh vs. PC DOS microcomputers; discrete vs. matrix quadraphonic systems. These are three of a long list of examples from recent history where two (or more) alternative versions of a new standard battled for market dominance. One aspect common to most of these standards is the importance of network effects: the fact that many users buy a DOS-based microcomputer increases the utility of buying a DOS-based microcomputer (among other reasons because the amount of software, technical support, etc., available for DOS users will be better and more widely available).
Given the importance of network industries, it is surprising that little attention has been paid to the role of public policy in standards battles. Consider the cases of high-definition television (HDTV) and mobile telecommunications.