CS 891 Economics of Information
Chapter 8: Cooperation and Compatibility
15 Mar 2006
Presented by:
Mahesh Maryada
(mmaryada@cs.odu.edu)
Tarakeshwar Mandala (tmandala@cs.odu.edu)
Chapter Summary
This chapter focuses on openness strategies, open migration and discontinuity, which are
fundamentally based on cooperation with allies.
To compete effectively in network markets you need allies, and identify them early in the game.
Standards change the market strategies in a different ways. Standards expand network
externalities as they enhance compatibility and interoperability, thus generating greater value for
the users. Standards reduce uncertainty and thus accelerates acceptance of new technology.
They also reduce consumer lock-in if the standard is truly open. Standards shift the competition
from a winner-take-all battle to a more conventional struggle for market share. From features to
prices for the reason that many features are common across all brands. From systems to
components as various components are compatible with one another. Standards ignite
competition to offer proprietary extensions so that the suppliers can differentiate themselves with
others.
Formal standard setting is now being used to develop more standards than ever before. Formal
standard setting is slow, but it can give a new technology enormous credibility. Several key tactic
will make you more effective in the formal standard setting process. Look for opportunities to build
alliances by cutting creative deals, such as licensing arrangements, with selected participants of
the standard-setting effort.
When you are participating in a formal standard-setting process, you need allies to ignite positive
feedback. Keep in mind the competitive advantages you aim to retain for yourself. Allies can
include customers, complementors, suppliers and competitors. Be prepared to offer special deals
to early supporters: with positive feedback, a few visible early supporters can be enough to tip
expectations in your favor, making it easier to attract more allies over time. A temporary price
break on the royalty may also be adopted. Pivotal or influential customers should get special
deals.
Before you engage in a standards battle, try to negotiate a truce and form an alliance with your
would-be rival. An agreed-upon standard may lead to a far bigger market that you can share with
your partners.
Discussion Questions
1. IBM will be using Red Hat-based platform instead of Windows Vista for their
desktops, beginning from July. Will Microsoft need to consider making their
software open source in order to keep their market?
2. Why are Oracle, Netscape, and Sun investing in the $100 million Java fund?
What is it that adds value to these investments?
3. Why is Intel going into video-conferencing and FedEx creating a Web site for
commerce?
4. Are openness and compatibility always best for the consumer?