The Evolution of Standards

204 Pages·2003·9.594 MB·English

by  Volker Simmering (auth.)

Volker Simmering
The Evolution of Standards
GABLER EDITION WISSENSCHAFT
Okonomische Analyse des Rechts
Herausgegeben von
Professor Dr. Peter Behrens
Professor Dr. Manfred Holler
Professor Dr. Claus Ott
Professor Dr. Hans-Bernd Schafer (schriftfOhrend)
Professor Dr. Rainer Walz
Universitat Hamburg, Fachbereich Rechtswissenschaft II
Die tikonomische Analyse des Rechts untersucht Rechtsnormen auf
ihre gesellschaftlichen Foigewirkungen und bedient sich dabei des
methodischen Instrumentariums der Wirtschaftswissenschaften, ins
besondere der Mikrotikonomie, der Neuen Institutionen- und Konsti
tutionentikonomie. Sie ist ein interdisziplinares Forschungsgebiet, in
dem sowohl Rechtswissenschaftler als auch Wirtschaftswissen
schaftler tatig sind und das zu wesentlichen neuen Erkenntnissen
Ober Funktion und Wirkungen von Rechtsnormen gefOhrt hat.
Die Schriftenreihe enthalt Monographien zu verschiedenen Rechts
gebieten und Rechtsentwicklungen. Sie behandelt Fragestellungen
aus den Bereichen Wirtschaftsrecht, Vertragsrecht, Haftungsrecht,
Sachenrecht und verwaltungsrechtliche Regulierung.
Volker Simmering
The Evolution of Standards
With a Foreword by Prof. Dr. Manfred J. Holler
Deutscher Universitats-Verlag
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Dissertation Universitat Hamburg, 2002
1. Auflage Mai 2003
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ISBN-13:978-3-8244-7832-3 e-ISBN-13:978-3-322-81514-9
001: 10.1007/978-3-322-81514-9
Foreword v
Foreword
The first essay in Volker Simmering's study in The Evolution of Standards, undertaken
while at the Graduate Programme in Law and Economics in cooperation with the Institute of
SocioEconomics at the University of Hamburg, examines the effects of "globalization" on the
evolution of global standard(). The central result of this essay is that there may be too few
global standards and those which do evolve are not necessarily efficient; a result that is at
odds with standard economic reasoning. Simmering derives his result from the application
evolutionary theory - which is becoming increasingly popular in economics, the social sci
ences, and philosophy. This branch of theory focuses on the convergence and selection of
equilibria and its attendant reduction of variety.
Simmering's study, very interestingly, indicates a major difference in the results of evolu
tionary reasoning when applied to the coordination of human interaction to that at the species
level. Simmering shows how variety is reduced to produce homogeneity or compatibility;
while in biology it has been to show how variety emerges. For example, in his The Origin of
Species (1859), Charles Darwin tried to give an interpretation of the characteristics, diversity,
and distribution of the various forms of animal and plant life as the result of a historical proc
ess involving descent with modification. This process includes the origin of two or more dis
tinct species, or other groups, from a single ancestral group, and also the natural modification
of a line of ancestors and their descendents to such a degree that the later forms may be mark
edly different from the earlier. The question in economics is different. It is not to explain why
so much variety exists but whether an equilibrium that is selected by a process of evolution is
efficient; or whether the intervention of benevolent dictator can improve the outcome from a
social point of view.
The message of Herbert Spencer's Social Darwinism and its trivialization as "survival of the
fittest" suggests that society progresses to efficiency. However, fitness is defined relative to
the surrounding conditions, i.e. the property of relevant populations. But, even nature is not
always "successful" in selecting a single best alternative. For instance, a large variety of spe
cies of antelopes graze side by side in the Serengeti. Their horns are evidently useful and yet
may be of different forms in different species. It seems impossible that the characteristic form
in each species is precisely that best fitted for the survival of that particular species.
Among other concepts of evolutionary game theory, Volker Simmering builds upon an ap
proach of Ralf Peters (1998) 1, also developed at the Institute of SocioEconomics, and applies
the size of the basin of attraction to discuss stability and convergence properties of his indus
try model. Through this, he derives interesting conclusions for the optimal decision on the
legal status of formal standards.
Simmering's second essay analyzes conditions of technological progress in networks under
the assumption of switching costs and a limited life span for goods. Users have to decide
whether they exhaust this life span or prematurely switch to a technologically advanced ver
sion of the good. The rational solution to this problem depends clearly on what others do.
Simmering demonstrates that, counter-intuitively, the presence of switching costs tends to
support transition to new technologies under these conditions. The third essay derives from
joint work on harmonization within the European Union by means of majority voting in
Peters, R. (1998): Evolutionlire Stabilimt in sozialen Modellen. (Diss.) MUnchen.
VI Foreword
committees such as CEN and CENELEC (Holler and Simmering, 2001i. Voting outcomes
depend on whether the components of a system good are standardized so that they are com
patible and, e.g., the amplifier of system A can be used in combination with the loudspeakers
of system B. In case of standardization, harmonization on a mix of components of systems A
and B is possible and a majority voting on various combinations to single out a unique mix of
components is appropriate. However, anticipation of the voting outcome, Simmering shows,
may cause producers td keep their systems incompatible. This implies that the optimal system
may not be available for harmonization through voting.
Simmering's book will be of interest to scholars of standardization and network economics.
The results of his last essay contribute to the understanding of European Standardization. The
results of the second essay are potentially relevant for decision making on the supply and de
mand of technologically advanced goods and thus they contribute to the explanation of tech
nical progress. The evolutionary model in the first essay should motivate a more profound
understanding of socio-economic processes and solutions to coordinating social interaction.
Simmering's message is key to critically assess the more standard perspective of rational
choice.
Manfred J. Holler
Holler MJ. and Simmering, V. (200 I): "Voting on Harmonization." Paper presented at the Annual Meeting
of the European Public Choice Society, Paris, 2001.
Preface VII
Preface
I wish to use this opportunity to thank the people and the institutions that made this disserta
tion possible. I begin with thanking my doctoral supervisor, Prof. Manfred Holler, for his
valuable advice and support that greatly benefited both me, personally, and my thesis. My
sincere thanks goes to Prof. Hans-Bemd Schafer for his role as the director of the Graduate
College for Law and Economics and the second supervisor of my thesis. In his role as the
former, his great dedication to setting up and shaping the Hamburg Doctoral Program in Law
and Economics, making it a unique institution and an outstanding chance for its participants,
is commendable. As my co-supervisor, he has been instrumental in introducing me to new
ideas. I next thank Prof. Norbert Schulz for supporting and encouraging me. I also thank Prof.
Robert Cooter for making my stay at the UC Berkeley as a visiting scholar possible, which
was a great experience and help for my research.
I thank Markus Berndt and Padmashree Gehl Sampath as well as Heide Coenen, Prof. Al
fred Endres, Helge Janfien, Prof. Marc Lemley, Ines Lindner and Dirk Reuscher for their
helpful comments and inspiring discussions. I thank Oliver Goettsche for his patience and his
careful work on the manuscript.
I gratefully acknowledge financial support by the German National Research Foundation
(DFG) and the Berkeley Law and Economics Program.
Finally, I thank my parents and Ulrike Hahne for their love, encouragement and help.
Volker Simmering
Abstract IX
Abstract
The thesis comprises three essays on the evolution of standards in networks. Networks ex
hibit positive adoption externalities, so-called "network effects". The essays investigate vari
ous aspects of how such effects influence the performance of markets and other institutional
arrangements.
In the first essay, an evolutionary game theoretic model is introduced in order to study how
increasing integration among nations ("globalization") influences the evolution of global
standards. It is found that integrated markets tend to produce too few global standards. Even if
global standards do evolve, agents do not necessarily end up with the best available one. In
addition, strategies for policy intervention are discussed. The role of laws that render adoption
of technical standards mandatory are compared with voluntary standards issued by recognized
standardization bodies.
The second essay is devoted to the problem of technological progress in networks. It focuses
on industries where the goods that are associated with each technology have a limited life and
users, due to sunk costs involved, are either more or less committed to their chosen technol
ogy. The study suggests that the risk of too much technological change is low in such indus
tries. In contrast, users tend to suffer from too little technological change. The lower the us
ers' commitments the higher the risk that established technologies are too sticky. A fruitful
strategy of governmental technology policy, the analysis suggests, is to fasten the transition
process if an already ongoing transition is observed.
The third essay studies the resolution of conflicts within international standardization bod
ies. We discuss whether voting is an eligible mechanism for collective decision making in
such bodies. It is demonstrated that outcomes of votes on harmonization of international stan
dards are likely to be stable and not path dependent, even if goods are specified in more than
one dimension. In addition, pitfalls that might arise with harmonization policy are identified.
In case the harmonization body cannot commit to abstain from harmonization - even if it has
observed that the industry performs badly - the outcome with harmonization policy might be
inferior to the outcome that would be achieved without harmonization policy. Thus, ex post
desirable harmonization policy might be undesirable ex ante.
Table of Contents Xl
Table of Contents
1. Introduction 1
2. The Economics of Networks, Compatibility and Standardization:
Definitions, Basic Concepts and Insights 7
2.1 The Concept ofN etwork Effects 7
2.2 Basic Problems in Competitive Network Markets 11
2.3 Compatibility, Standardization, Harmonization and Integration 16
2.4 Commitments 20
2.5 Compatibility and Competition 22
2.6 Empirical Evidence ofN etwork Effects 29
3. An Evolutionary Approach to Network Effects and Globalization 32
3.1 Introduction 32
3.2 Review ofS elected Literature 33
3.3 The Model Setup 35
3.3.1 Populations 35
3.3.2 Interaction Games 36
3.3.3 Integration 37
3.3.4 Fitness 39
3.4 Existence ofE quilibria 43
3.4.1 Isolated Populations ((0=0) 43
3.4.2 Integrated Populations (15(0<0) 45
3.4.3 Harmonization 46
3MV~~ %
3.5 Social Welfare 47
3.5.1 Welfare With Harmonization 48
3.5.2 Efficiency of Variety and Harmonization 48
3.6 Does Globalization Lead to Efficient Harmonization ofS tandards? 50
3.7 Some Interpretations oft he Assumptions 53
3.7.1 Darwinian Selection 53
3.7.2 Conditional Strategies 54
XII Table of Contents
3.8 Extension: Double Adoptions - Production of Compatibility by Users 56
3.8.1 Review of Selected Literature 56
3.8.2 The Strategy Sb 58
3.8.3 The Effects of Double-Adoptions 60
3.8.4 Illustration 63
4. Mandatory or Voluntary Standards? 65
4.1 Introduction 65
4.2 The Effects ofM andatory and Voluntary Standards 66
4.2.1 Inducing a Collective Switch through Voluntary Standards 66
4.2.2 Changing Interaction Payoffs through Mandatory Standards 69
4.2.3 Which Kind of Standard is Optimal? 70
4.3 The Stability of Variety 71
4.3.1 Formal Expressions 71
4.3.2 Variety's Stability and the Integration Level 72
4.3.3 Variety's Stability and the Agents' Preferences 73
4.3.4 Variety's Stability and the Populations' Sizes 74
4.3.5 Variety's Stability and Efficiency of the Global Standards 75
4.4 Technical Harmonization within the EU 76
4.4.1 The Process of Technical Harmonization in Europe 77
4.4.2 How European Standards Produce Harmonization 79
4.4.3 Results 83
4.5 Conclusions 86
5. The Impact of Users' Commitments on Technological Progress in
Network Industries 88
5.1 Introduction 88
5.1.1 Link to the Evolutionary Model in Section 3 88
5.1.2 Summary of the Model 89
5.2 Review ofS elected Literature 92
5.2.1 Modeling Dynamic Demand 93
5.2.2 A Brief Note on Sponsored vs. Non-Sponsored Technologies 99
5.3 The Model Setup 102
5.4 Equilibria 105
5.4.1 Perpetual Stay, Immediate Switch and Sequential Adoption 106
5.4.2 Equilibria With Strong Commitments (C '?ct) 116
l