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Market Vs Consensus Negotiation Mechanisms For The Adoption of Industry Compatibility Standards

We apply a game-theoretic real options approach to analyse two mechanisms for the adoption of industry compatibility standards. One mechanism focuses on achieving consensus via negotiation within a committee and the other via the market. We derive equilibrium strategies for both mechanisms and show that their equilibrium performance in terms of expected payoffs are equivalent when analyzed as an option timing game with asymmetric strategies. In terms of which mechanism performs better with respect to achieving coordination of standards, the mechanisms are equivalent unless the first mover advantage to both players is high or the second mover advantage to both players is high. However, since a player cannot have both a first and a second mover advantage at the same time, at any given time the payoff states are such that comparison under this criteria is economically insignificant. Our results are important because a large normative question in the study of such standards is which of these mechanisms performs better.