CS 891 Economics of Information

CS 891 Economics of Information Chapter 8: Cooperation and Compatibility 15 Mar 2006

Presented by: Mahesh Maryada ([email protected]) Tarakeshwar Mandala ([email protected])

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?