The relationship between technical standards and behavioral and societal norms governing usage of the Internet, and other networked telecommunications facilities, is extremely complex. These two modes of “regulation” can be viewed both as substitutes and as complements in a static sense. That is true also in the dynamic sense, but technical standards that may substitute for behavioral norms in the short-run can induce new (or transform pre-existing) institutionalized social norms ? and in that respect are dynamic complements. This is only the beginning of the complexities.
“Standards” of all kinds possess some of the properties that economists associate with “pure public goods”, but one should distinguish conceptually among technical reference standards, technical safety standards, and technical inter-operability or so-called “interface” standards. In practice, most formal standards (whether of the de jure regulatory form or specifications accepted de facto by industry) possess elements of more than one of these three idealized types. Although in each case their public goods properties carries the implication that competitive markets cannot be relied upon to provide standards efficiently, the form of the “market failure” and resulting inefficiency is likely to be quite different — depending upon whether or not the standard in question governs a system (or sub-system) characterized by the presence of significant network externality effects.
In the latter case, which applies particularly to “interoperability” standards (whether technical or behavioral), the problem is that market processes give rise to positive dynamic feedbacks leading to de facto “regulations” that may be socially suboptimal, both from an engineering efficiency viewpoint and because they may inhibit the future competitive entry of technological and organizational innovations. Granting intellectual property rights protections to inventions that become embedded in “standards” further exacerbates this problem. By contrast, in the case of case of safety and security standards, and reference standards, the more likely form of market failure is a chronic under-provision of socially desirable standards.
Careful attention to the specifics of the technical and social context of standardization initiatives, consequently, must be seen to be essential for appropriate public policy analysis and standard-setting action. In this regard, it is fortunate that the development of the economics of standards and standardization during the past 15 years has been marked by an increasing focus upon empirical research. The results appearing in the research literature have made evident the general relevance of positive network externality effects of the kind that during the late 1980′s and early 1990′s became the focus of theoretical explorations in this emerging field. But, in doing so, these research advances also have revealed the multiplicity of different structural conditions and the corresponding variations in the strength of positive feedback externalities among the many specific sub-markets that constitute the digital economy.
The Chair organised, jointly with VoxInternet, on March 31th, 2009, a seminar on the Technical regulation of the Internet. This seminar was introduced by Paul A. David, Professor of Economics (Emeritus), Stanford University & Professeur Titulaire, Chaire Innovation et Regulation.