Standardization in

Technology-Based Markets

Gregory Tassey

Senior Economist

National Institute of Standards and Technology

(gtassey@nist.gov)

June 1999

[Forthcoming in Research Policy]
Standardization in Technology-Based Markets

Gregory Tassey1

Senior Economist, National Institute of Standards and Technology

Abstract

The complexity of modern technology, especially its system character, has led to an increase the number

and variety of standards that affect a single industry or market. Standards affect the R&D, production, and

market penetration stages of economic activity and therefore have a significant collective effect on innovation,

productivity, and market structure. Standards are classified into product-element and nonproduct categories

because the two types arise from different technologies and require different formulation and implementation

strategies. Because standards are a form of technical infrastructure, they have considerable public good

content. Research policy must therefore include standardization in analyses of technology-based growth

issues.

Keywords: standardization, innovation, R&D, economic growth, industry structure

Through R&D-performing industries and the effect of new technologies on other parts of the

economy, technology accounts for one-third to more than one-half of U.S. GDP growth and at least

two-thirds of productivity growth. However, the so-called “high-tech” sector only contributes

approximately 7 percent of U.S. GDP.2 This relatively small direct contribution implies substantial

leverage by this sector on the overall economy, but also that extensive diffusion of new technology

must take place if adequate productivity growth rates are to be achieved by the entire economy.

Standardization affects both innovation and technology diffusion. It also can influence industry

structure and thereby help determine which firms benefit and which do not from technological

change. Thus, a concern of R&D policy should be the evolutionary path by which a new technology

 

1

 Email: tassey@nist.gov. The author is grateful to Albert N. Link for comments on previous drafts.

2

Tassey [1997]. The high-tech sector is defined here as consisting of four major categories: high-tech

manufacturing (IT-related plus industrial electronics), communication services, software and computerrelated services, and pharmaceuticals). For alternative definitions of IT-related high-tech industries, see

American Electronics Association [1997, p. 128] and Department of Commerce [1998, Appendix p. A1–2].

The AEA definition results in a 6.1 GDP estimate for 1996 and the Commerce definition yields about 8

percent for 1998. To either of these definitions should be added pharmaceuticals, which brings the AEAdefined high-tech sector’s GDP contribution to 7 percent.
2

or, more accurately, certain elements of a new technology become standardized. Over a

technology’s life cycle, standardization can affect economic efficiency. However, these effects can

be both positive and negative. For example, standardization can increase efficiency within a

technology life cycle, but it also can prolong existing life cycles to an excessive degree by inhibiting

investment in the technological innovation that creates the next cycle.

Standardization can and does occur without formal promulgation as a “standard.” This

distinction between de facto and promulgated standards will be made apparent and discussed in the

following sections. In one sense, standardization is a form rather than a type of infrastructure

because it represents a codification of an element of an industry’s technology or simply some

information relevant to the conduct of economic activity. On the other hand, the selection of one of

several available forms of a technology element as “the standard” has potentially important

economic effects.

1. Economic Functions of Standards

A standard can be defined generally as a construct that results from reasoned, collective choice

and enables agreement on solutions of recurrent problems. Looked upon in this way, a standard can

be viewed as striking a balance between the requirements of users, the technological possibilities and

associated costs of producers, and constraints imposed by government for the benefit of society in

general (Germon [1986]).

More functionally, an industry standard is a set of specifications to which all elements of

products, processes, formats, or procedures under its jurisdiction must conform. The process of

standardization is the pursuit of this conformity, with the objective of increasing the efficiency of

economic activity.

1.1. Nature and Scope of Impacts

Standards played an important role in the industrial revolution. They allowed factories to

achieve economies of scale and enabled markets to execute transactions in an equitable and efficient

manner. Standardization of parts made supplier specialization possible and increased efficiency over

the entire product life cycle by facilitating part repair or replacement.

In a modern economy, standards constitute a pervasive infrastructure affecting the technologybased economy in a number of important and relatively complex ways. Some of these impacts even

appear contradictory. For example, whereas the traditional economic function of standards in

production can restrict product choice in exchange for the cost advantages of economies of scale,

other types of standards common to advanced production and service systems can actually facilitate

product variety and hence choice for the customer.

Fig. 1 depicts the multiple functions performed by standards. These functions transcend the

three major stages of technology-based activity  R&D, production, and market penetration, and

are difficult to construct and implement because many important technologies have both an intrinsic
3

Strategic

Planning Production Market

Development

Value

Added

Entrepreneurial

Activity

Risk

Reduction

Infratechnologies

Proprietary

Technologies

Generic

Technologies

Science Base

Acceptance

Test

Standards;

National Test

Facilities

Interface

Standards

Process & Quality

Control Standards

Technical Basis for

Standards

Measurement and

Test Methods

Materials

Characteristics

Databases

Transaction

Standards

Standardization of

Technology Elements

Fig. 1. Roles of Standards in a Technology-Based Industry

complexity and a "systems" character. Such characteristics demand more sophisticated

technological foundations for standards and imply the need for technically competent standards

setting processes.

The greater complexity of technologies and the associated networks of firms and supporting

infrastructure that develop and disseminate these technologies mean that supply chains are becoming

the most important level of policy analysis. Greater distribution of R&D among materials and

equipment suppliers, manufacturers of products, and providers of services increasingly characterize

high-tech supply chains. The

consequent increase in market

transactions involving technology

also demands standards to reduce

the associated transaction costs.

Technology consists of a

number of discrete elements that

tend to evolve in different

institutional settings. These

elements have distinctly different

character and require different types

and combinations of standards to

effect efficient development and

utilization (Tassey [1992, 1997]).

Many variations exist but broadly

defined they fall into the three

major categories shown in Fig. 1:

(1) The fundamental or generic technology base of the industry on which subsequent market

applications (products and services) are based

(2) A set of infratechnologies that provide a varied and critical technical infrastructure to support

for development of the generic technology and subsequent market applications

(3) The market applications (proprietary technologies)

Because the type of R&D required for each element differs significantly, so do private-sector

investment incentives with the result that underinvestment varies across the different elements of an

industrial technology. The greater the infrastructural character of a technology, the more

underinvestment is likely to occur. Standards and thus their technical underpinnings have a strong

infrastructure character, so that underinvestment is common.

 1.2. Basic Functions of Standards

To analyze the economic functions of standards in a technology-based economy, a taxonomy is

required that classifies standards by functions having unique economic characteristics. For the

purpose of economic impact assessment, the functions of standards are classified into four
4

categories.3 The positive effects of each of the four functions are described below. However, as

discussed in later sections, standards also can have negative economic consequences or simply fail to

achieve their maximum potential economic benefit.

1.2.1. Quality/Reliability

Standards are developed to specify acceptable product or service performance along one or

more dimensions such as functional levels, performance variation, service lifetime, efficiency, safety,

and environmental impact. A standard that specifies a minimum level of performance often

provides the point of departure for competition in an industry. For example, a case study by Putnam,

Hayes and Bartlett [1982] points out that when an automobile manufacturer develops a new engine,

the company specifies the minimum acceptable lubrication attributes. This specification then

becomes the basis for competition among petroleum companies, who either compete on price at the

minimum specified level of quality or by offering motor oil with a level of performance above the

minimum.

1.2.2. Information Standards

Standards help provide evaluated scientific and engineering information in the form of

publications, electronic data bases, terminology, and test and measurement methods for describing,

quantifying, and evaluating product attributes. In technologically advanced manufacturing

industries, a range of measurement and test method standards provide information, which, by virtue

of being universally accepted, greatly reduce transaction costs between buyer and seller. In their

absence, especially for complex, technology-based products, considerable disagreement will often

ensue over verification of performance claims. These disputes raise the cost of consummating a

marketplace transaction, which is reflected in higher prices charged. The economic impact is to

slow market penetration.

Measurement methods are also essential to conduct state-of-the-art research. In today’s

semiconductor R&D, scientists and engineers must be able to measure the distances between

individual atoms (dopants) that are added to silicon to achieve the desired millions of high-density

electronic functions on a single chip. Standardization of some of these methods is essential for the

efficiency of R&D itself. For example, being able to replicate and verify research results is often

critical to obtaining follow-on research funding or commitment to commercialization. Standardized

scientific and engineering data (in the sense of having been critically evaluated and verified for

accuracy) and standardized equipment calibration techniques are also essential for efficient R&D.

Finally, the typical manufacturing process is increasingly measurement intensive because of

growing demands for quality and real-time process control. Traditional manufacturing processes

tested products after a production run. The inefficiency of this approach is large, not only because of

the wasted material and labor when a production run must be scrapped, but also because of down

 

3

 This taxonomy follows Tassey [1982, 1992, 1997] and Link and Tassey [1987]. David [1987] proposes a

similar taxonomy based on three kinds of standards (reference, minimum quality, and compatibility). Other

taxonomies have been developed based on the process by which a standard comes into existence. For

example, David and Greenstein [1990] provide a framework to classify standards as de facto (“unsponsored”

or “sponsored”) or promulgated (voluntary or dejure).
5

time and hence unused capacity incurred while a problem is identified and fixed. 4 The availability of

computers makes possible the real-time monitoring and control of a process, potentially enabling

instant adjustment of process variables.

When fully implemented, real-time control can virtually eliminate waste and increases product

mix flexibility. However, real-time control of a production process is a complex systems

technology, requiring large numbers of sensors, computers, and software. Standardization of certain

performance measurements for, say, a sensor facilitates design of the equipment. Equally large

efficiency gains can occur from standardization of certain elements of the actual methods or

techniques of process control, as adherence to these standards often removes the need for much of

the post production testing. Finally, whatever production strategy is adopted, the equipment that

helps execute the strategy must be periodically calibrated by standards in order to ensure maximum

efficient performance.

1.2.3. Compatibility/Interoperability

Standards specify properties that a product must have in order to work (physically or

functionally) with complementary products within a product or service system. This function of

standards has been the most intensively studied by economists.5 Compatibility or interoperability is

typically manifested in the form of a standardized interface between components of a larger system.

An effective interface standard does not affect the design of the components themselves, such as

numerically controlled machine tools or the components of these tools, including controllers. In

fact, interface standards provide “open” systems and thereby allow multiple proprietary component

designs to coexist — that is, they enable innovation at the component level by being competitively

neutral with respect to design. In effect, competitors can innovate on "either side" of the interface,

while the consumer of the product system can select the particular components that optimize system

design. They also allow substitution of more advanced components as they become available over

time, thereby greatly reducing the risk of obsolescence of the entire system. Widespread factory

automation as it is currently evolving in advanced economies likely will not proceed without these

standards.

Without interface standards, large companies often supply “turnkey” systems where proprietary

interfaces link components. However, the cost to the user can be high because the system is not

optimized for the user’s particular needs (competitors will typically offer components that are

superior to some of those in the turnkey system) and price competition will not be a factor when

system components need replacement.

In such situations, system design can still be optimized. However, the cost of modifying

physical and functional interfaces to allow components from different vendors to work together (i.e.,

to “interoperate”) is usually prohibitive. Moreover, full functionality is often not obtained by

reengineering proprietary (nonstandard) interfaces.

 

4

 Scrap can result when periodic testing of product reveals an attribute flaw. All units produced between the

sample product tested and the previous test are equally defective.

5

 See, for example, David and Steinmueller [1994], Kahin and Abbate [1995], and Link and Scott [1998].
6

1.2.4. Variety Reduction

Standards limit a product to a certain range or number of characteristics such as size or quality

levels. The fourth function of standards is the traditional one of reducing variety to attain economies

of scale. The majority of standards perform this function. However, variety reduction is no longer

simply a matter of selecting certain physical dimensions of a product for standardization (such as the

width between threads of a screw). Variety reduction is now commonly applied to nonphysical

attributes such as data formats and combined physical and functional attributes such as computer

architectures and peripheral interfaces.

The process of setting variety reduction standards also varies significantly. Many standards of

this type are viewed as infrastructure and thus adopted by an industry consensus process. However,

standardization of some attribute or element of a product is just as often achieved through the

marketplace by one firm gaining control of the underlying technology and using this control to force

other manufacturers with whom that firm competes to adopt its version of the technology. The

product element then becomes a de facto (non-consensus) standard.6

Conceptually, the variety reduction function is the most difficult category of standardization to

analyze because of its ability to either enhance or inhibit innovation. Variety reduction typically

enables economies of scale to be achieved, but larger production volumes tend to promote more

capital-intensive process technologies. This common evolutionary pattern of a technology over a

number of product life cycles usually reduces the number of suppliers and increases their average

size. Such trends may or may not reduce competition, but often progressively exclude small,

potentially innovative firms from entry due to increased minimum efficient scale thresholds.

2. Types of Standards

Standards have been classified by the form they take. To varying degrees all four functions of

standards specified above can be described alternatively in terms of design specifications or

performance levels. Design-based standards are much more restrictive and can inhibit innovation to

a greater degree than performance-based standards. The latter type allows flexibility in product or

service design while still meeting the performance requirements of the standard. Thus, standards

generally work more efficiently when they are performance based.

 The economic functions of standards aggregate into two basic categories  product and nonproduct  delineated by their relationship to product (or service) structure and their public good

content. Distinctions between the two types are important because their economic roles are

distinctly different and hence so are the processes by which they are set. The differences in public

good content have important implications for policy because the rationales for government

intervention are very different in the two cases.

Simply put, standardization of one or more attributes of a product (or service) can convey direct

competitive advantage to the owner/controller of the technology producing those attributes. They

 

6

 Intel’s microprocessor architecture and Microsoft’s operating system are well-known examples.
7

therefore get considerable attention from economic growth strategists. Conversely, non-product

standards tend to be competitively neutral, at least within an industry or trading block. Hence, they

tend to get less attention. Yet, this latter category can be critical to the entire industry’s efficiency

and its overall market penetration rate.

2.1. Product-Element Standards

Product-element standards typically involve one of the key attributes or elements of a product, as

opposed to the entire product. Government, especially where large economies of scale are present or

when early market entry is considered an essential part of a national economic strategy, mandates

some product-element standards.

In most cases, at least in the U.S. economy, market dynamics determine a de facto standard.

Alternative technologies intensely compete until the dominant version gains sufficient market share

to become the single standard. Market control by one firm can truncate this competitive process.

Such control is particularly effective in cases of increasing returns and can quickly force acceptance

of the monopolist’s proprietary technology element as the standard. However, the globalization of

high-tech markets with shorter product life cycles is making single-firm dominance more difficult.

In response, various combinations of vertical and horizontal consortia are promulgating productelement standards by consensus, at least within a single large economy or trading block.

One of the more visible examples of the competitive effects of de facto standardization is the

"architecture" of personal computers.7 Elements of computer architecture such as the operating

system, the "bus," the graphical user interface, and the applications programming interface, have

been the focus of intense competition by firms seeking to gain sufficient market control to “set” the

de facto standard for the particular product element.8

In this regard, Apple Computer made a brilliant move when it forced third-party software

developers to adopt a standard "graphical user interface" so that all programs running on Apple's

computers presented the user with the same screen format and command structure.9 However, Apple

kept its hardware operating system proprietary (i.e., it did not adopt an open systems architecture

strategy) and thus it had no chance to become the industry standard. This decision explains Apple’s

initial prosperity and subsequent competitive decline. In contrast, Sun Microsystems opened the

microprocessor architecture for its workstations in order to obtain help in gaining market share. It

 

7

 Architecture is the scheme by which the function of a product is allocated to physical components (Ulrich,

[1995, p. 419]). Architecture is important because it provides a set of standardized product attributes and the

rules or protocols for their interaction with other product elements.

8

 The business literature continues to debate the efficacy of competition to supply the product elements that

constitute an architecture. See Morris and Ferguson [1993].

9

 The term graphical user interface refers to the use of "menus" of images instead of characters to indicate

instruction options for the computer user. Apple pioneered this much-preferred format and also made this

approach even more attractive to users by sticking to a standardized format for all application programs.
8

was willing to share its markets in return for the increased probability that its architecture would

become a standard and thereby create a large and stable customer base.

The policy issue is thus: To the degree that certain product elements must become standardized

to enable economies of scale and network externalities to be realized, the potentially large benefits

that accrue to the firm owning the technology element are acceptable. However, this is the case as

long as competition is not constrained in the other elements that make up the overall product or

system technology.

This caveat with respect to economic efficiency was the basis for charges by software firms that

Microsoft was using its monopoly position as owner of the dominant operating system standard to

gain unfair advantage in marketing its own versions of new operating system elements (such as a

web browser) and applications programs that run on that operating system. Such charges were

pursued in a 1998–1999 U.S. government antitrust lawsuit.

In contrast, the Japanese PC industry has never been able to establish a single standard operating

system. Reasons for this include (1) an oligopolistic industry structure (keiretsu), which has resulted

in factionalism within the industry and thereby prevented a single standard (domestic or foreign)

from gaining dominance; (2) a mainframe computer orientation, which for a long time relegated PCs

to basically terminal status, thereby slowing market growth; (3) a reluctance to move away from

customized software; and (4) a language barrier—the inability to export kanji-based software

(Cotrell [1994]).

Over a technology’s life cycle, additional elements of the product’s technology become

standardized so that the product takes on a “commodity” character. Competition among suppliers of

the “standardized” product then becomes increasingly based on price and service-related aspects of

the product’s acquisition and use. Dell Computer, for example, has succeeded in the PC industry by

being the low-cost producer and offering excellent before and after sales service. This evolutionary

pattern was noted decades ago by the famous Austrian economist Joseph Schumpeter [1950], who

observed that one of the essential dynamics of capitalism is assuring that the "silk stockings" initially

purchased only by the rich would eventually be items of mass consumption.

2.2. Nonproduct Standards

Nonproduct standards, as the name implies, derive from a different technical base than that upon

which the attributes of the product itself depend. Industry organizations often set these standards

using consensus processes. The technical bases (infratechnologies) for such standards have large,

although not total, public good content, so that their provision frequently depends upon a

combination of industry and government investment. Examples of infratechnologies frequently

embodied in nonproduct standards include measurement and test methods, interface standards,

scientific and engineering databases, and artifacts such as standard reference materials (Tassey

[1997, Chaps. 8 and 9]).

Most infratechnologies and therefore the resulting industry standards are derived from basic

standards. Basic standards represent the most accurate statements of the fundamental laws of

physics and have such diverse applications that they qualify as pure public goods and hence are
9

BASIC

STANDARDS

LABORATORY

STANDARDS

TRANSFER STANDARDS

INDUSTRY STANDARDS:

methodological/procedural/

normative

Frequency

Standard

Laser Interferometer

Line Reticle

Line-Width

Measurement

Methods

Fig. 2. Hierarchy of Nonproduct Standards (Tassey, Chap. 9)

provided entirely by government. Basic standards are relatively few in number and are not easily

transported to or used by industry. Thus, as indicated in Fig. 2, such standards are converted into

working and transfer standards that convey the standardized information to industry. Large numbers

of industry standards are based on (traced back to) basic standards. With respect to form, most

industry standards are either method, procedural, or normative.10

Fig. 2 provides an example of the hierarchy through which basic standards are utilized to

develop infratechnologies upon which semiconductor industry standards are based. The production

of semiconductor components is a

highly demanding process. The

densities of today's circuits are

such that each conducting path

("line") on a chip is a small

fraction of the width of a human

hair. These widths must be

consistent with respect to design

specifications to avoid thermal,

electrical, and other problems.

The semiconductor producer

therefore needs to be able to

measure the widths of circuit lines

that make up a “chip.”

Particularly important are line

widths on the masks that are used

to inscribe the multiple layers of

circuit patterns on the chip itself. Such masks are used to make tens of thousands of chips. Their

quality greatly affects performance of the chips produced and hence a semiconductor manufacturer's

production yield.

The line-width measurement equipment must be calibrated against a physical standard, which

has a pattern of lines whose thickness and spacing have been determined to a specified level of

accuracy. This determination is done by an authoritative source, such as the National Institute of

Standards and Technology (NIST) in the United States. The physical or "transfer" standard used by

industry must be easily transportable (a reticule in the above example) in order to ensure widespread

and accurate transfer of the infratechnology.

The information transferred by a physical standard is itself determined or certified by a so-called

working standard, which is laboratory based and more accurate but not readily transportable. In this

example, the working standard is a laser interferometer, which measures and certifies the physical

 

10 A normative standard is one in which a particular value (size, performance, quality, or design) is selected

from a range of alternative values.
10

dimensions of the line reticule prior to transfer to industry. Finally, the laser interferometer is itself

dependent for calibration on a "basic" standard for length. 11

The four basic functions of standards are all represented in the range of standards for a single

industry like semiconductors. Many standards, like line-width measurement, provide information,

while others affect variety reduction, quality, reliability, or compatibility. The collective economic

impact of these standards is greatly magnified when an entire supply chain is considered.

Semiconductors are a component of computers and communications equipment, which, in turn,

constitute an information network. Each level in the supply chain requires an elaborate

infrastructure of standards.12

3. Market Structure Effects of Standards

The market structure effects of standardization have important effects on the achievement of

economic growth objectives. “Open systems” allow small and medium companies to participate in

markets for system technologies by supplying components in which they have a comparative

advantage. This diversification on the supply side of the market makes system optimization by users

(the demand side) possible and increases price competition.

Decisions by large companies to enter systems markets at the component level are also affected

by the availability of interface standards. These firms typically target larger markets where they can

benefit from economies of scale. A strategy of selling into markets characterized by proprietary

turnkey systems requires a high degree of product segmentation in order to service each turnkey

system integrator. This situation increases costs and constrains market growth projections, even

with a superior technology. The more distributed the participants in a market, the more critical to

technological innovation are open systems.

A good example is medical services, which has traditionally suffered from excessive

customization. Moreover, healthcare environments are becoming extremely distributed. In every

 

11 Line-width measurement is just one of many infratechnologies that a competitive semiconductor industry

must utilize. For example, current state-of-the-art chips consist of multiple layers of circuits. The circuits in

each layer must be connected to adjoining layers. Accomplishing this very difficult manufacturing step

requires a precise alignment of the “mask” (circuit pattern) for each layer. Until recently, the alignment

process required multimillion-dollar optical equipment. NIST, however, developed a procedure that allows

semiconductor manufacturers to ensure proper alignment of successive layers of an integrated circuit with a

precision better than ten nanometers. This new calibration standard represents a more than fivefold

improvement over current alignment calibration methods and is much less expensive. The cumulative

economic impact of such advances in infratechnologies/standards is substantial and can greatly affect price

as well as quality, and hence competitive position for the domestic industry.

12 In communication networks, for example, there are published standards and interface protocols that allow

hardware components and software from many vendors to operate as a single product or as a system of

products (i.e., as a network). To achieve efficient or "seamless" integration, the standards and protocols

define what rules hardware components must adhere to in order to exchange signals between applications

software and operating systems at different levels in the network.
11

local community there are multiple sites  hospitals, labs, clinics, pharmacies, home-care settings,

and so on  that conduct numerous clinical and administrative activities. Currently, the operational

computing infrastructures across these organizations are rarely the same. In this environment,

incomplete standardization is an increasingly serious problem. User-defined attributes for specific

applications make plug-and-play data interchange impossible. Even where two applications are built

according to an existing standard, frequent user-defined modifications to the applications often

prohibit “seamless” communication between them.

The solution to such a problem, where standards exist but customization of applications creates

incompatibility with the existing standardized interface, is to develop and reach agreement on true

open systems. Achieving complete interoperability eliminates levels of complexity in implementing

limited or partial standards. In the healthcare area, Hewlett-Packard took the lead in organizing an

industry consortium (The Andover Working Group) to build an “enterprise communication

framework (ECF)” that provides a common interface for data communications. HP was motivated

by its desire to sell multiple products into a single large market. With interoperability among system

components, such a market retains the advantage of diversification at the component and system

levels and also achieves the efficiency advantages of interoperability.

Such interoperability is a demanding challenge. It is achieved by encapsulating existing

standard message profile specifications into software objects called enterprise communicators.

These communicators provide a comprehensive set of rules that make it possible for developers to

achieve interoperability for their applications without having to completely understand the existing

complex standards and rewrite them into their applications. This software code is packaged within

the ECF and embedded into third-party applications as a software component.

In practice, attaining truly open computer systems has been extremely difficult, with

achievement of compatibility being partial at best. One of the major reasons for this difficulty is the

complexity of systems technology. Each one of a number of layers in the hierarchical structure of a

typical information system must have its own architecture and these architectures must be integrated

into a larger network. Today, systems technologies not only have complex hardware and software

platforms, but require rules and protocols to introduce, process, store, move, and retrieve

information.

The existing systems architectures are typically controlled by a handful of firms. Vendors often

claim to conform to open systems' requirements, but in reality they conform only to a portion of the

set of standards to which compliance is necessary to sell their systems. Moreover, even when true

open systems compatibility is offered, users often find that mobility from their current proprietary

system to the open system does not exist, even when the same vendor provides both. That is,

mobility products are not made available, leaving the user with a severe transition problem. Such

partial conformity standards tend to segment the market structure.

In summary, lack of conformity to interface standards by the supply side of a market can be a

conscious strategy or a reflection of the poor quality of the standard.13 Large firms with market

strategies focusing on turnkey systems have an incentive to resist open systems to protect the market

 

13 See David and Greenstein [1990] for an excellent review of the early literature on these topics.
12

shares resulting from their horizontally integrated strategy. In cases of increasing returns, such

strategies may result in a monopoly position being attained by one supplier or prolonged market

segmentation by several competing suppliers. Either situation has the potential to constrain

economic efficiency.

Conversely, large users are likely to want to have access to several different classes or brands of

a particular product, or at a minimum have a second source of supply for a critical component. Such

product users have substantial need for effective interfaces. The ability to integrate equipment and

software from different vendors (or even to integrate different classes of equipment from a single

multi-product vendor) has several economic benefits: system costs can be reduced and performance

optimized thereby increasing productivity, competition among vendors for each element of the

system lowers prices, and responding to technological or functional obsolescence is facilitated by

replacing individual components at relatively low cost.

At the product or component level, increasing returns can result in a monopoly position for one

supplier. If the product happens to be critical in some way, that monopoly can be extended into

related component markets. In other cases, multiple standards exist for extended periods of time

resulting in a segmented market structure. The latter situation is caused by high switching costs

relative to perceived benefit gains by users. These switching costs can be increased when suppliers

with monopolistic control of portions of the market for the main product (such as a minicomputer)

fail to agree on a single standard for a complementary product (such as the operating system). The

UNIX operating system is an important example.

4. “Systems” Aspects of Standards

Product and nonproduct standards within a product or service system interact with each other to

create a systems character to the overall economic effects of standardization. The interactions

among different types of standards that affect a single industry are summarized in Fig. 3. Each of

the two industries shown here depends on standardized formats and evaluations of scientific and

technical information from supporting science and technology infrastructures. They use this

information to select and conduct R&D projects.

These industries then set additional standards specific to their internal needs for production

efficiency. Finally, each industry must also be concerned with standards that affect their ability to

sell their products in specific markets. Meeting procurement specifications in domestic markets or

complying with certification requirements for exporting to foreign markets are examples. Moreover,

as many products now become components of larger product systems, part of meeting specifications

is demonstrating compatibility with the performance attributes of other products.

Interaction among interface standards occurs because of the need to optimize product systems.

For example, a numerically controlled machine tool is a system of components such as the controller

and numerous sensors. Link and Tassey [1987, pp. 88−96] point out that the multiple interface

standards involved in a machine tool allow modularization of the product, which permits custom

design and prevents obsolescence. However, these standards must be linked by a common data

format, if all components are to function together as an efficient system.
13

Fig. 3. The Structure of Industrial Standardization [Tassey, Chap. 9]).

ProductElement

Standards

Nonproduct

Standards

ProductElement

Standards

Nonproduct

Standards

Interface Standards

Industry 1 Industry 2 System-Level

Standardization

Product-Level

Standardization

Generic

Technology Infratechnologies GenericTechnology

Science Base

Moreover, the structure of the components affects the interface standards. The technical

difficulty and hence cost of constructing an interface standard increases when all components are

completely proprietary. A frequent solution is to standardize certain attributes or elements of key

components. In the case of the machine tool, a standard architecture for the machine tool controller

has been agreed upon. This step has

significant efficiency advantages, such

as allowing upgrades to the controller

without costly reengineering of the

interfaces between the controller and

other hardware and software

components.

As Tassey [1997, pp. 172−175]

points out, industries that have

complex, measurement intensive

production processes must reengineer

multiple standards simultaneously for

each new generation of the generic

product technology. The semiconductor

industry is an excellent example. In the

past, a single dominant integrated

circuit supplier has undertaken the development of standards associated with transitions between

generations of semiconductor process technology (usually revolving around wafer size).

However, accomplishing the transition now requires a complex and integrated standards

development process, involving a large number of different standards. The huge estimated cost of

next generation fabrication plants and shorter product life cycles finally have made the risk too great

for individual IC manufacturers to incur the considerable burden of undertaking the standards

development efforts alone. As a result, an international consortium of semiconductor firms is

undertaking the development of standards for the generation of semiconductors based on a 300

millimeter wafer.

5. Potential Negative Impacts of Standardization

Both types of standardization described here can greatly increase overall economic efficiency

and hence rates of growth in technology-based industries. However, through their structure or

through the timing of their implementation, they can also have negative economic impacts.

5.1. Product-Element Standards

Once a product-element standard is set, network externalities are typically realized. However,

the marketplace dynamics that result in one firm’s version of the technology becoming the standard

do not guarantee that this version is the optimal one. A “lock-in” effect ensues, whereby many
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developers of related products conform to the standard and purchasers of the standardized

technology invest substantial resources in learning to absorb and use it as well as complementary

technologies and infrastructures. These sunk costs create a reluctance to switch to a new standard

and related cluster of technologies. Considerable resources are then allocated to an inferior

technology, which can extend over long periods of time.14

As pointed out by a number of economists, the controller of the product-element standard

captures increasing returns to scale as initial market penetration begets dominance. This may be an

acceptable price for rapid market growth from an economic welfare perspective, as long as either the

standardized version of the technology element is the best one or sufficient opportunity exists for

market forces to periodically replace the standard.15

The tendency for modern technologies to have systems structures increases the economic

importance of the lock-in phenomenon. In particular, most technologies today have clusters of

standards embedded in them. One, however, is frequently the dominant or driver standard. Thus,

the controller of that standard can have even greater impact on the evolutionary development of the

overall technology and related markets.

While the lock-in effect works on the demand side, the “installed base” effect impacts the supply

side. Dominant suppliers of a technology, who either control or adhere to the standard, have

invested substantial resources in developing and servicing the markets based on this standard. Their

established market positions promote evolutionary as opposed to revolutionary migration of

customers, who demand backward mobility to existing technology. Mobility is more difficult and

expensive, the more radical the new technology. If Microsoft, Apple, and IBM were freed from

maintaining compatibility with existing hardware software, new generations of systems software

would likely evolve at a faster pace.

5.2. Nonproduct Standards

Because this class of standards consists of a set of “tools” that make the process of developing,

producing, and marketing the core technology more efficient, they do not have the dominant or

controlling effects of product-element standards. Thus, the potential negative impacts are not as

obvious. However, negative economic effects can occur. They typically result from three problems:

(1) multiple standards for the same infratechnology, (2) poorly designed standards, and (3) poorly

timed standards.

Multiple standards usually arise in the early phases of a technology’s development when

innovating firms are intent on achieving market penetration. At this point, the market is often not

 

14 For more than a decade, DOS — a clearly inferior operating system to alternatives such as Apple

Computer’s system — dominated the personal computing market because the Microsoft/IBM combination

was able to lock in the PC market.

15 Arthur [1996] provides an excellent analysis of the increasing returns-to-scale phenomenon that

characterizes many technology-based industries and the consequent motivation for firms to set and control

product-element standards.
15

large enough to warrant investment in infratechnologies such as sophisticated test methods.

Consequently, innovators rely on off-the-shelf or contrived methods that hopefully convince

customers to try the new technology.

However, as the market expands, imitators enter with their own versions of the required test

methods. Confusion among buyers soon takes over, as different vendors provide test methods that

produce different results. The cost to buyers of determining what test method most accurately

measures performance rises as their purchases increase. Moreover, because these multiple

measurement and test methods are typically adapted from previous generations of the underlying

infratechnology, they are frequently inaccurate and sometimes markedly so.

These first two problems can be resolved by additional research to develop better

infratechnologies, which can then be adopted as single industry standards. However, because a

consensus process involving numerous industry stakeholders promulgates most standards of this

type, developing the needed infratechnology and reaching a consensus on the standard often

encounters substantial obstacles.16 The resulting delays can create significant costs in executing

market transactions, which raise prices and thereby retard market penetration.

The problems of multiple standards and the timing of standardization also arise at the interface

between components of a system of technologies. The increasingly important objectives of

compatibility and interoperability are implemented through interface standards. Interface standards

typically have both physical and functional elements and can be extremely complicated to design,

especially in systems technologies where multiple components must interoperate.

The timing of interface standards is not only important, but also often essential for small firms

that supply a single component to a larger system. Often, a standard interface must be in place for

small firms to even contemplate entering the market. Thus, poorly designed or delayed interface

standards can have decidedly negative effects on market structure.17

5.3. Cost

The economic cost of inadequate standardization (either no standard or a poorly designed one)

can be very high. A study by Brunnermeier and Martin [1999] estimated that interoperability

problems associated with sharing product and engineering data impose annual costs on the U.S.

automotive supply chain totaling approximately $1 billion. Resources expended to correct or recreate data files because of software incompatibilities account for more than 80 percent of the total.

Delays in the introduction of new vehicles are responsible for almost 10 percent of the cost. Other

expenses include purchases of several vendors' versions of software designed to perform similar

tasks and spending for data-exchange services. Other large U.S. industries, such as aerospace, have

similarly large electronic data transmission requirements within their supply chains, so the total cost

 

16 See U.S. Congress, Office of Technology Assessment [1992].

17 Delays can also occur simply because all component technologies do not evolve at the same rate. Laggard

components of the system are often characterized by chaotic entry and exit as well as by rapid technological

change, which prohibits consensus being reached on needed standards.
16

to the U.S. economy of inadequate interoperability standards is much greater than the estimate for

the automotive supply chain alone.

One potential solution is the evolving international Standard for the Exchange of Product Model

Data (STEP), or ISO 1303. STEP is a neutral file format intended to support computer-to-computer

exchanges of all types of product data, from initial design to maintenance requirements. However,

this standard is itself very complex and is requiring a huge investment worldwide to develop the

generic set of standards. In addition, infratechnologies such as test methods and software tools must

be developed to facilitate industry's adoption and implementation of interoperability standards.

6. Degrees of Standardization

From both the corporate strategy and public policy points of view, standardization is not an allor-nothing proposition. In complicated system technologies, such as distributed data processing,

telecommunications, or factory automation, standardization typically proceeds in an evolutionary

manner in lock step with the evolution of both embodied and disembodied technology. The pattern

of evolution is determined by several factors: the pace of technological change embodied in each

component category; disembodied technology development, which determines the overall system

architecture and organization; and changes in market structure (and, with it, the incentives and

ability to force the standardization process).

In the case of numerically controlled machine tools, early total standardization of data formats

would have severely compromised the range of performance attributes desired by different users in

the machine tools they purchased. Thus, a degree of standardization has been optimal, at least up to

this point in the technology's evolution. In other words, complete standardization too early in the

technology life cycle can constrain innovation.

As technology-based systems become increasingly important and "windows of opportunity" for

making successful investments in the associated markets continue to shrink, the relevant standards

will have to be managed. If a standard is fixed, even if it is competitively neutral, it will eventually

act to stifle the introduction of new technology into the system. Alternatively, if the standard is

updated frequently, then version consistency (upward mobility of current system components) can

become a problem.

For example, efficient data processing and communications networks are possible only if

standard interfaces are provided on all the communication paths in the network. Such interfaces

need to be defined between application programs, data formats, network protocols, printer control

codes, human/machine interfaces, and so on. But, these system elements are all evolving at different

rates and thus need updated interfaces at different points in time.

Thus, with new technologies continuously being introduced into ever expanding networks, the

pressure on the standards infrastructure to adapt is substantial. One reason is the need to reflect

changes in the core distributed processing technology. Another is the requirement to adapt system

management technologies such as toleration of faults, rapid (real time) response to multimedia inputs
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and outputs (voice, image, text, and others), and human friendly interfaces to a constantly changing

network structure as nodes are added, removed, or replaced by different systems.

7. Policy Implications

In most cases, market dynamics seem to affect standardization of product elements that drive

network externalities. As long as the private-sector originator and hence controller of the standard

does not use this control to gain advantage in related products, long-run efficiency seems attainable.

On the other hand, if monopoly control by a single firm becomes entrenched or, conversely, if no

standard emerges (i.e., multiple standards persist) to the detriment of economic growth, some policy

action may be required.

Cottrell [1994, pp. 163–164] discusses how the Japanese government tried in several ways to

remedy the multiple PC standards problem in its domestic industry. The SIGMA (Software

Industrial Generalization and Maintenance Aids) Project and a subsequent five-year extension

(SuperSIGMA) were major government efforts to achieve a Unix operating system standard and

thereby deal with the economic inefficiencies of a heterogeneous (nonstandardized) product

structure. The project attempted to promote automated software development and create

standardized Unix-based data structures, communications interfaces, and applications platforms.

An important policy implication is that research projects can be funded with a pure “technology

development” objective or a combined “technology and standardization” objective. The TRON

project in Japan is an example of the latter.18 R&D projects that involve horizontal cooperation

between suppliers of system components (e.g., computer hardware and software firms) can promote

standardization of key product elements at an earlier point in the technology life cycle. Such joint

research ventures with standardization as an objective are occurring more frequently, especially in IT

industries.

Finally, government R&D can establish and demonstrate a backbone infrastructure, which in

turn promotes private-sector R&D investment in standards to enable effective use of this

infrastructure. No private entity would have funded several decades of the Internet’s development,

as it slowly evolved to its current state where enormous private investment is now taking place.

Industry standards such as Java are enabling a host of applications to be developed and implemented,

but Java would not have been possible without the U.S. government’s persistent funding of the

Internet’s predecessors.

This last example exemplifies a key issue for government R&D policy. Success as an innovator

manifests itself in a large installed base. The lock-in effect that results from the role of increasing

 

18 The TRON Project has been an ongoing effort between Japanese industry and universities since 1981. It

seeks to develop standardized operating systems, which in turn will drive compatible hardware

development. However, the installed base effect of the dominant U.S. industry standards has at least

partially thwarted this effort, as one of the largest Japanese computer firms, NEC, has invested so much

effort in marketing MS-DOS/ WINDOWS/UNIX machines that the company has not participated in TRON.

See Cottrell [1994, p. 166] and Kahaner [1991].
18

returns to scale can be accepted as a natural and even desirable attribute of many technology-based

markets. However, this characteristic along with the installed-base effect can combine to prolong

technology life cycles at the expense of newer, more efficient technologies. The standard setter can

maintain control by migrating the installed base through several incremental generations of the

technology within a longer life cycle. This supply-side incentive to resist major technological

change is reinforced by the fact that, once a large customer base is attained, user demand for

backward mobility further promotes an evolutionary rather than a revolutionary approach to change.

This phenomenon is a major reason why smaller firms appear more innovative, especially with

respect to radical innovations; they are not encumbered by the installed base.

One possible policy response is to require, through regulation, equal access to applications

markets so that the firm controlling the infrastructure standard does not use this advantage to restrain

competition (Arthur [1996, p. 106]). Government funding of new generations of technology-based

infrastructure is another response to dealing with the negative effects of this type of standardization.

The Internet provides a great example of the basis for a new technology life cycle that may

eventually replace the “Wintel” standards of the current PC technology life cycle.19 In fact, the

“open systems” nature of the Internet may preclude the type of lock-in strategy observed so often in

the 1980s. Netscape gave away its Internet browser and attained 70 percent of the market. Its

objective was to obtain potentially larger and more lasting profits from the substantial value added

available from software applications accessed through the browser. Similarly, America Online

gained an initial substantial lead of more than 4.5 million subscribers by giving away free services.

In these and other similar cases, however, ease of entry implies achieving lock-in is problematic at

best.

Policy implications for non-product standards and investment in the associated infratechnologies

are subtler. Public sector infratechnology investment is not resource intensive. The semiconductor

industry, for example, spends $4-5 billion per year on measurement equipment (Finan [1997]).

However, the government support for the infratechnologies (measurement and test methods, for

example) and associated standards required to attain the productivity goals of this investment is

considerably less. Nevertheless, tight R&D budgets in most industrialized nations during the 1990s

have constrained infratechnology research support.20

The critical point is that a range of infratechnologies and associated standards are needed by

industry over the technology life cycle. Individual standards may have modest economic impact, but

the large number of standards required by the typical high-tech industry means that the collective

impact is substantial. Government research program management and associated funding must be

sufficient to provide this complex technical infrastructure in the time frames dictated by industry

R&D strategies in response to competitive trends.

 

19 “Wintel” refers to the dual hardware and software standards controlled by Intel and Microsoft, respectively.

20 For example, NIST infratechnology research funding relative to U.S. industry R&D spending, which NIST

is charged with supporting, is one half the level of 25 years ago.
19

8. Conclusions

Over the past decade, the infrastructure roles of standards have increased in importance because

(1) many new technologies are systems or networks so that increasing returns to scale can generate

huge economic rewards for the version of a technology that becomes the standard, (2) the demand

for quality and reliability in technologically complex products and systems requires a range of

standards based on sophisticated infratechnologies, (3) the systems nature of critically important

technologies means that competition is greatly affected by the degree of standardization within

product structures and at the interfaces between components of these systems, and (4) the shortening

of the average technology life cycle has on average increased the pressure on the standards setting

process with respect to timing.

The central strategic problem of managing the timing and content of standards is a difficult one

because (1) many types of standards are needed in today's typical technology-based industry, (2)

they interact to varying degrees with one another, and (3) nonproduct standards, as one type of

technology infrastructure, derive from different sources than the industry's core technology and

thereby often conflict with corporate strategies.

Because the U.S. domestic market is large with considerable internal competition in most

industries, American economic philosophy has allowed the competitive dynamics of the marketplace

to set product-element standards. Issues of unfair advantage in related markets for the firm whose

technology eventually wins out as the industry standard are raised periodically. In other cases,

several competing “local” standards coexist for some time, resulting in complaints of inefficiency.

In Europe, more coordinated standardization efforts in areas such as wireless communications have

been undertaken to gain first mover advantages. This latter approach is causing U.S. industry and

government managers to rethink their laissez faire standards strategies.

More generally, industry structures and hence long-term economic efficiency can be

significantly affected by which firms’ technologies become industry standards and the degree to

which standardization enables or inhibits access to the markets for a technology. To the extent that

monopolistic control of a standard or the existence of multiple standards produces economic

inefficiency, the globalization of technology-based competition can accentuate these problems.

More national economies are now capable of competing for the dominant product-element

standard in technology-based industries. National governments often support the domestic

industry’s standard over alternatives. Moreover, multinational alliances of firms frequently pursue

their versions of a product-element standard in emerging technology-based markets. Thus, multiple

standards can arise and persist for some time. In such cases, multilateral efforts should be

undertaken to at least harmonize these competing standards, if not to select one as a single

international standard at an appropriate point in the technology life cycle.

In contrast, nonproduct standards have a more persuasive infrastructure character and thus,

unlike product-element standards, evolve largely through non-traditional market processes. Such

standards are themselves based on infratechnologies, which often derive from a different science and

engineering base than does the industry’s core technology. If correctly configured, they are
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competitively neutral and have their economic impact by increasing efficiency for all domestic

suppliers and customers in the particular market for the product or service.

The unavailability of standards at different points in a technology’s life cycle can result in large

economic inefficiency. Both types of standards can also cause economic losses if they are poorly

structured. Multiple standards may exist for prolonged periods of time, limiting economies of scale

or network externalities and hence total market growth, although market growth may be greater in

the long run if this situation allows superior technology to eventually dominate. Therefore,

especially because the process of standardization within a technology life cycle is often irreversible,

these and other elements of the dynamics of this process are key policy variables.

Finally, standardization over a technology life cycle has a dynamic character, in that different

degrees of standardization are optimal at different points in both the technology’s and the industry’s

evolution. Moreover, because standards interact with each other in imparting their economic

impacts, the process of standardization frequently must be managed as a system.

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