A Unified Economic Model of Standard Diffusion: The Impact of Standardization Cost, Network Effects, and Network Topology1

This paper is motivated by the following question: What drives the diffusion of a communication standard and what results can we expect? Past literature provides many instructive but mostly unrelated answers. Frequent findings are startup problems, penguin effects, and tendencies toward monopoly. But substantial problems in applying the models to concrete standardization problems reveal that the dynamics are probably more complex. Not all networks are ultimately conquered by a single standard once it has attracted a certain number of users. And not all diffusion results are either complete or no standardization. We address the question of the conditions of particular diffusion behaviors by developing a formal standardization model that captures all fragmented phenomena in a unified approach. Drawing from findings of other research, we incorporate the structure of the underlying user network as an important determinant for diffusion behaviors. The approach allows us to disclose varying conditions that generate frequently observed standardization behaviors as special parameter constellations of the model. Using equilibrium analysis and computer simulations we identify a standardization gap that reveals the magnitude of available standardization gains for individuals and the network as a whole. The analysis shows that network topology and density have a strong impact on standard diffusion and that the renowned tendency toward monopoly is far less common. We also report how the model can be used to solve corporate standardization problems.