Standardization/Adoption of Technology Flashcards
How can standards be classified?
Standards can be classified in product Vs non-product (process) standards; on the base of the type of product differentiation (vertical VS horizontal); whether they are private (voluntary or proprietary) or public (mandatory or voluntary) or de facto (e.g. Microsoft and VHS).
De facto standardization is a synonym for voluntary open standards1. Examples of product standards are the international toy safety standards.
Examples of process standards are environmental standards (e.g. the percentage of recycled paper used in the production of paper sheets).
This last case is considered to be a process standard because it does it not affect the final use of the product. Should this happen, the standard has to be considered product-related.
Vertical standards usually affect a specific industry or business (e.g. standards in the construction industry), while horizontal standards interest all industries (e.g. fire protection and first aid standards).
Private standards are strategically set quality standards (e.g. in the food industry); private standards can also be more stringent than public standards. An example is represented by the industry of dairy products in Argentina and Brazil.
In both countries, public standards set basic safety and hygiene requirements. In Brazil, private standards were set mainly to drive down costs in the supply chain while in Argentina they were used to develop quality differentiation in the product market.
What positive role do standards play in the economic activity?
The general (positive and negative) effects of standards can be summarized in the table below for each of the economic problems they solve (column on the left).
Standards can: provide compatibility (which boosts international trade) and information (particularly important to ensure a certain level of product quality with credence goods in situations of information asymmetry, e.g. the case of safety standards); allow achievement of economies of scale; and solve problems related to market failures (such as information asymmetry and negative environmental externalities) by improving the coordination among consumers.
In particular, compatibility standards increase the network of users adopting the same good or compatible ones, thus increasing welfare.
To the extent to which standards convey information, they also favour competition and reduce the risk for the consumer of not knowing what they are buying.
To sum up, we could conclude that standardization has a positive effect on the diffusion of existing (standardized) technologies but a negative effect the invention of new ones.
What negative role standards might play?
Regarding product standards, these might reduce competition (if a dominant group is able to influence standard setting) and decrease product variability.
The presence of these negative effects depends on the design of the standards and whether they are set by public or private actors.
High costs for the society might appear if standardization leads to lock-in into an inferior technology.
Mandatory product standards introduced to improve safety can create moral hazard (i.e. consumers may become less cautious in the use of goods).
Regarding process standards (e.g. measurement standards), negative effects result from (1) multiple standards for the same infratechnology2, (2) poorly designed standards, and (3) poorly timed standards.
The implications are confusion among consumers, they bring high costs of testing the different standards, and have negative effects on firms´ profits and market structure. The term “regulatory captures” refers to the lobbying activity of some producers.
What do we mean by product-element and non-product standards?
Product standards specify the characteristics of a product; process standards specify the characteristics of a production process. Process standards are important because they indirectly affect the quality of goods produced, the efficiency of the production process and the environment.
What does “minimum standard” mean?
Minimum standard” refers to the minimum level of “quality or attainment” a product should contain in order to meet the required standard
What do we mean by „systemic character of standards“?
Systemic character of standards refers to the interaction between different types of standards (e.g. product and non-product standards) within a single industry. The initial scientific input is standardized in a specific format (e.g. scientific literature). The information contained in these standards is then used in R&D projects. Each industry adds additional standards required to improve efficiency internally (product-level standardization which might affect both product-element and non-product standards). Finally each industry is concerned that their products are compatible with others from different industries (system-level standardization). Moreover, the entire standardization process in made possible by the use of infratechnologies.
What does positive feedback on the demand side mean? What is the difference between the terms “positive feedback”, “increasing returns on adoption” and “network externalities/effects”?
From an economic point of view the concepts of “positive feedback on the demand side”, “increasing returns on adoption” and “network externalities/effects” have different meanings.
Positive feedbacks on the demand (or supply side) result from network externalities.
Increasing returns to adoption of one technology means that the more individuals adopt a technology, the more experience is gained with that and the more the technology is improved (learning by using).
- > They all mean that customers´ (or producers´) benefits from the adoption of a technology depend on the number of subjects (or firms) who have already adopted it.
- > In the case of technologies such as internet, each additional participant creates benefits for all other participants. These benefits are direct and clear (direct network effects).
- > In the case of video recorders or other system technologies, network effects are conditional on disposing of more than one component related to the same technology (e.g. the hardware-software paradigm, electric cars and charging stations or replacement of spare parts) => indirect network effects are established via the market for complementary goods and services.
Network externalities are often coupled with high switching costs, a situation that may dangerously need to lock in (see lecture 8). Similarly, because of the presence of network effects, the technology adopted is not necessarily the best one.
Standards arising from the presence of network externalities are de facto.
Which approaches of technology adoption can we recognize?
Two approaches to technology adoption: static and dynamic
Static approach Technology adoption game
≡both users exhibit network externalities for both technologies (“battle of the sexes”)
Static approach Technology adoption game
How can you explain static approach?
Static approach Technology adoption game
- Excess inertia users delay adopting a new technology ((OLD, is the played Nash equilibrium but the outcome (NEW, is characterized by higher utility)
It describes the situation in which the economy is locked in with an inferior technology
This situation arises when the new users have to bear the costs of innovating (because of the presence of positive externalities)
Example of payoff matrix - Excess momentum consumers rush to adopt an inferior technology
The adoption of the new technology is inefficient The costs of such choice are bear by the users who stick to the old technology
How can you explain dynamic approach?
Dynamic approach Focus on factors affecting timing and frequency of adoption
≡ Consumers‘ degree of substitution between getting a more advanced technology, and the network size
≡ Technology growth rates and consumer population size
≡ The degree to which a new technology is compatible with the old technology to be replaced
Example:
in the computer industry, new and faster chips are introduced very often, however, not every improvement is adopted and marketed.
Technology improvements
To each newly adopted technology we attach a “ serial” number denoted by g, g = l, 2, …. Illustration of the path of state of the art technology improvements T t ), the adoption dates of g and g+1 technologies t g and t g+1 ), and the path of actually adopted technologies V t
Consumers and changing technologies
Consumers adopt the product only when they are young, and are assumed to gain utility from first period consumption only
The utility of each young consumer exhibits network externalities in the sense that utility increases with the number of (old and young ) consnmers using the same
technology
New generation products are incompatible with old generation products
Consumers adopt the state of the art technology , they cannot benefit from the expanded network gains since the old generation consumers have already
purchased the old technology
New technology adoption
How the degree of substitution between the advance of technology and the network size affects the adoption of new technologies
Two extreme cases: the two components are either perfect complements or perfect substitutes
What is the trade under mutual standard recognition and under mutual non recognition?
under mutual standard recognition 1. When governments recognize all standards of all products, firms can costlessly export 2. In price competition, there is a unique undercut proof equilibrium
under mutual non recognition 1. Government of each country prohibits sale of product adopting different standards 2. Each firm is a monopoly in its own country deadweight loss
Effects of specific types of standards on trade
• Effect of compatibility standards on international trade
positive to the extent that they allow capturing international network externalities or coordinating activities in a more efficient way, or embodying information about consumer preferences in foreign markets
sometimes incompatible standards are adopted intentionally as a market segmentation device with the aim to reduce competition and trade (e.g. Hewlett Packard printers that work only with regionally produced ink cartridges
•
Effect of safety standards on international trade
safety standards not designed with the purpose of acting as a protectionism device, can increase trade, decrease it or leave it unaffected depending on the effect of standards on the relative cost of domestic and foreign producers, the level of competition and
consumers ´willingness to pay WTP) for safer products
•
Effect of environment related standards on trade:
involve both product (when the negative externalities arise from the consumption of the product) and process standards (when the negative externalities arise from the production of the product)
the impact of environmental standards on trade depends on the type of standards and whether it is applied only to domestic or also to foreign producers
