Choosing the Rules for Formal Standardization

Formal standardization – explicit agreement on compatibility standards – has important advantages over de facto standardization, but is marred by severe delays. I explore the tradeoffs between speed and the quality of the outcome in a private-information model of the war of attrition and alternative mechanisms, and show that the war of attrition can be excessively slow. I discuss strategies to reduce delay, including changes in intellectual property policy and in voting rules, early beginnings to standardization efforts, and the use of options. ♣ Even supposedly backward-compatible software isn’t always, and while the body of the paper below is (newly) pdf’d from the 1996 file, this title page and the references have had to be re-processed (March 2002); I am doing this in part because I hope soon to rescue this paper from my own “severe delays.” Compatibility standards often are developed through a process of explicit consensus. When participants have little vested interest in particular outcomes, the process will be straightforward | participants working together to nd the best technical solution. If anything, there might be a free-rider problem, as development of the standard could be a public good. But participants often do have strong vested interests, and while this helps overcome the free-rider problem, it can make it hard to reach consensus, as each participant holds out for agreement on its preferred standard. Farrell and Saloner (1988) modeled such disagreement in consensus standard-setting using a complete-information war-of-attrition model. Their analysis predicted that consensus standardization is more likely to achieve coordination on a standard than is a de facto standards race, but that (on average) it is slow: the equilibrium delays may dissipate a large fraction of the potential gain from the process. This is essentially a bargaining problem and a bargaining ine±ciency. As the modern literature on bargaining suggests, it is useful to make explicit the private information that drives bargaining behavior and bargaining ine±ciencies. In this paper, accordingly, I develop an incomplete-information war-of-attrition model to assess the performance of consensus standardization. I nd that the predicted delays are often long enough to make the process perform very poorly, even on a somewhat optimistic view of its merits. Standards organizations' policies that reduce vested interest may help in I thank the National Science Foundation and the Berkeley Committee on Research for research support. I thank seminar participants at Berkeley, Davis, UCLA, Santa Barbara, Lisbon, Barcelona, LSE, USC, Calgary, Vancouver, TPRC, Harvard, NBER, Aix-en-Provence, OECD, and Oxford; and especially James Dana, Glenn Ellison, Barry Nalebu®, Eric Rasmusen, Pierre Regibeau, Michael Whinston, and Charles Wilson for helpful comments. I also thank the members of ANSI's X3 Strategic Planning Committee, especially its former and current Chairs, S.P.Oksala and C. Cargill, for helpful comments, although they do not necessarily agree with my approach and conclusions. My views on standard-setting have evolved in part through work with Garth Saloner and Carl Shapiro, although they are not responsible for my statements here. I thank Chris Simpson and Anthony Raeburn of the IEC, and Christian Favre of the ISO, for interviews. Comments are welcome: Internet farrell@econ.berkeley.edu, phone (510) 642-9854 or fax (510) 642-6615.