The Economic Impact of Technology Standards

Jorge Padilla, John Davies and Aleksandra Boutin, all at Compass Lexecon, have published The Economic Impact of Technology Standards.

The authors argue that open technology standards, agreed through voluntary participation in industry bodies, lead to impressive industry performance through effects on market structure and on incentives for innovation.  They examine industries in which technical standards are important: mobile telephony, TV broadcasting and PC operating systems.  These case studies illustrate how and why standards matter for economic outcomes but also show how different economic outcomes emerge, depending on the institutional frameworks governing the development and adoption of standards. Open, voluntary standard-setting - in which experts from technology providers and equipment manufacturers work together to create openly published technical standards - allows firms of different sizes and specialisations to participate in the value chain.  In contrast, uncompetitive industry structures can emerge when standards are set by governments or are under the proprietary control of individual companies, harming innovation and efficiency.  

The mobile telephony industry illustrates some of the benefits of open standard-setting. Over the last 20 years or more, the number of devices sold has increased by about 20% per year, while the cost of mobile subscriptions relative to maximum data speed has decreased by around 40%. This impressive performance has arisen from a highly competitive market structure, at all levels of the supply chain. Not only is there competition in production of devices and software but upstream, the ownership and development of technology shows increasing diversity, from one mobile communications generation to the next. 

This competitive and diverse market structure partly results from the institutions that develop standards – the industry would be very different were there a large proprietary standard-owner or if governments were more directly involved in standard-setting.  Maintaining this approach depends on the Standard Development Organisations, which govern open standard-setting, striking the right balance between the interests of technology developers and technology users. 

The mobile telecoms model will not suit all industries. However, it offers an attractive alternative to a simple dichotomy of private monopoly vs government regulation.  In any event, as more products become connected in the ‘Internet of Things’, more industries will take on some of the characteristics of the telecoms industry, including the need to agree and use standards.