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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 in situations of conflict. Conflicts arise if the players agree that adoption by the industry of one particular standard is best for all, but they each have a vested interest in their own preferred standard being the industry choice. We analyse the two main mechanisms for standard adoption: one mechanism focuses on achieving consensus via negotiation and the other is via the market in which one player unilaterally adopts and expects her competitors to follow suit. A key question in the field is which mechanism performs better. Another is when should a participant take the lead and unilaterally adopt a particular standard.

We address these questions in our paper by deriving equilibrium strategies for both mechanisms. In particular, we show that by considering the problem from the unique perspective as a real option timing game, a comparison of the mechanisms to help inform the industries which performs best cannot provide a definitive answer because it depends on each of the participants' expected payoffs from unilateral adoption and concession at any given time. Furthermore, the equilibrium expected payoffs in each of the mechanisms are equivalent.