Abstract

We study de facto standard setting in markets with network effects. We closely examine the “browser war,” in which Netscape Navigator at first appeared likely to be a de facto standard, but Microsoft Internet Explorer eventually became the standard. This reversal is a puzzle we seek to explain. We draw on the theory of standard setting, especially on the positive economics predictions about market outcomes, such as a tendency to tip and a tendency toward inertia. The basic insights of standard setting theory are borne out in the browser war. In addition, linking standard setting logic to an analysis of market conditions, such as the rate of growth of demand and the distribution system, leads to a complete positive theory of standard setting. This complete theory explains the otherwise surprising reversal.

Introduction

De facto standard setting

We study de facto standard setting in markets with network effects. In markets for system goods – e.g., a computer and the software that runs on it, a CD player and music, a computer connecting to Internet websites – interface standards are particularly important. Like the other chapters in this book, we define interface standards as technical specifications that determine the compatibility or interoperability of different technologies. In such markets, standard setting is linked to the exploitation of network effects.