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Standards Competition in the Presence of Digital Conversion Technology: An Empirical Analysis of the Flash Memory Card Market

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journal contribution
posted on 01.03.2010 by Charles Z. Liu, Chris F. Kemerer, Sandra A. Slaughter, Michael Smith
Theoretical and empirical evidence suggest that in many markets with standards competition, network effects make the strong grow stronger and can “tip” the market toward a single, winner-take-all standard. We hypothesize, however, that this sort of standards-induced market dominance may be less common in the context of digital systems, where the presence of low cost conversion technologies may facilitate easy compatibility across competing standards. We empirically test our hypotheses in the context of the digital flash memory card market. We first test for the presence of network effects in this market, and find that network effects strongly influence competition between flash memory standards. We then analyze whether these network effects are moderated by the adoption of digital converters, and find that the availability of digital converters provides a measurable reduction in the price premium of the leading flash card formats relative to that of formats with lower market shares. These market dynamics imply that producers of non-dominant digital goods standards are better off with the provision of conversion technology, as this technology tends to neutralize the impact of network effects. In addition, further analysis shows that market concentration in the flash memory market decreases as converters become more widely available.