Technological Progress And Standards Competition With Network Effects

Based on systematical review of the historical papers about standards competition with network effects and the influencing factors, it was found that although technological progress is an essential attribute of networking technology, relevant studies are far from enough. Choi(1994) and Shy(1996) carried out the initial research on this topic, but few work have been done about this important issue since then. It is necessary to promote systematical studies in this field. This paper made the theme of "Technological Progress and Standards Competition with Network Effects", and aimed to classify and study different kinds of technological progress during the process of standards competition in networks.The studies in this paper can be summarized as follow: Based on a model that can represent consumers' heterogeneous preference and asymmetric compatibility, a deep research was given to find the sufficient and necessary coexisting conditions of standards competition with network effects in the framework of neoclassical economics. Three types of technological progress in networks was defined according to their different technological attribute, and the coexisting conditions of standards competition were respected, which aimed to find the fulfilled conditions and welfare influence of different technological progress in the process of standards competition with network effects.There is no common method to carry out all the studies relevant to standards competition with network effects. Network effects are expressed as "cooperative effect" in the framework of game theory, and consumers' maximizing behavior is neglected. The special topology and network structures are omitted in the framework of neoclassical economics, though network effects are expressed directly in consumers' utility function and the maximizing behavior of consumers and firms is recognized in this framework. The ACE method is suitable to simulate special topology in networks on the one hand, but still can not take firms' behavior into account on the other hand. This paper developed all the studies in the framework of neoclassical economics, considering the maximizing behavior of consumers and firms and showing respect to the researching tradition in this field.Standards competition leads to two different results of monopoly and coexistence, and the monopolist can always fulfill the new technology if it is favorable to her using her power in the market. This simple logic leads to an obvious result, but it is not the case when there are two or more coexisting firms, so we focused on the instance of standards coexistence, which required further discussion about the conditions that lead to standards coexistence. The coexisting conditions were listed in table 5.3. Though the multi-equilibriums have been acknowledged by most scholars for a long time, but the coexisting conditions have not been systematically studied up to now, so this work is one of the innovations in this paper and can be seen as the foundation to study technological progress in networks.The technological attributes of network effects were thoroughly analyzed, and it was found that different technologies and technological progress in networks have different effects on network effects, based on which, the technological progress was classified into three types as "technology progress in the fundamental utility part", "technology progress in the network effects part" and "compatibility progress". This classification constructs the foundation to analyze these three kinds of technological progress separately. Several cases were used and a lot of analysis was carried to justify the classification and avoid superficial judgment. It is a new try dividing the technological progress in networks into three types and studying respectively.To strengthen the explanatory power of the model and the results, consumers' utility functions were supposed to take on more characteristic of heterogeneity, and consumers were supposed to have "heterogeneous preference in the network effects part with different technology" and "heterogeneous preference in fundamental utility part with each technology". The compatibility was supposed to be asymmetric. Network effects were expressed by linear functions which is a critical but popular hypothesis in this field. Some of the results gotten under linear hypothesis can also be applied to analyze some specific nonlinear questions. Based on the analysis of firms' and consumers' maximizing behavior, firms' reaction functions was deduced, according to the characteristic of which, networks were divided into four types as " overall strong network " ," independent network "," weak but aided network " and "overall weak network".By the deduction and relevant analysis of the model, this paper finds that "technology progress in the fundamental utility part" and "technology progress in the network effects part" have the same fulfilled conditions. On the one hand, the technological progress can be fulfilled if there are "double winner" in the market, on the other hand, the technological progress can only be fulfilled under certain conditions, and even be driven out of the market if there is only "one winner", when a firm put forward one of these two kinds of technological progress. Firms even show inertia to put their technological progress into the market under some special conditions. These two kinds of technological progress have different welfare influence, and governor will be more eager in some cases or be more inert in other cases to adopt the new technology compared with consumers.The analysis about "compatibility progress" reveals that there are outer and inner restrictions for firms in networks to acquire this kind of technological progress. Compatible agreement is just a favorable and outer factor to acquire "compatibility progress". Compatible technology is the inner restricting factor to get "compatibility progress". Compatible incentive is the inner decisive factor for firms to acquire "compatibility progress". Analysis reveals that no matter in "strong network" or in "weak network", firms may show seemingly contradicting incentives of "compatibility inertia" or "compatibility excess". Firms sometimes find ways to be compatible with other networks, and sometimes they avoid doing so however.Several cases were given to justify the main results of the paper, and the theory is consistent with the reality in most cases, which should not be considered as coincidence.There exist four aspects that can be seen as innovations in this paper:Firstly, this paper gave a systematical review of the influencing factors and three researching frameworks on the topic of standards competition with network effects. Respect was given to amounts of classical papers and review was given on the base in the process of topic and method refining. Not only can this work helps to put forward the thesis and studying method, but also helps to judge the academic importance and orientation of relative studies in this field. Secondly, the coexisting conditions of the competing standards with network effects were discussed on the base of concrete hypothesis. Heterogeneous hypothesis was give to the coefficients of network effect and compatibility, which are two key parameters describing networks. A model was constructed and deduction was made to find the coexisting conditions for the competing networks. This work helps to enrich the theory of standards competition with network effects, and form the theoretical base to study the technological progress with network effects.Thirdly, technological progress in networks was classified into three types according to the technological attribute of network effects. Based on systematical analysis of the technological attribute of direct network effect and indirect network effect, technological progress was divided into three types of "technology progress in the fundamental utility part", "technology progress in the network effects part" and "compatibility progress", and cases were cited to justify and explain this classification. This argumentation constructs the foundation to studies these three kinds of technological progress respectively in this paper.Fourthly, systematical research was carried out to demonstrate the fulfilled conditions for these three kinds of technological progress in networks. It is found that "technology progress in the fundamental utility part" and "technology progress in the network effects part" have the same fulfilled conditions and different welfare influence. Firms often face inner and outer factors that limit their "compatibility progress", and they may show seemingly contradicting incentives of "compatibility inertia" or "compatibility excess" under different conditions. Several cases was used and analyzed to justify and explain relevant results. This work may be taken as the main innovation in this paper.This research about the technological progress in the process of standards competition with network effects is different both in content and method from the work of Choi(1994) and Shy(1996), and forms a theoretical system to some extent. We hope this paper can help to enrich the theory of network competition, and impel the research about technological progress in networks.