Standards Competition In The Presence Of Digital Conversion Technology:An Empirical Analysis Of The Flash Memory Card Market

Abstract

Both theoretical and empirical evidence suggest that in markets with standards competition, strong network effects can make the strong grow stronger and, in some circumstances, even 'tip' the market towards a single, winner-take-all standard. We theorize that in the presence of low cost conversion technologies and digital content, the tendency towards market dominance can be lessened to the point where multiple incompatible standards are viable. Our hypotheses are empirically examined in the context of the flash memory card market where both network effects and high quality conversion are present. The results show that the availability of digital converters reduces the price premium of the leading flash card formats more than of the minority formats. Therefore, producers of the non-dominant standards can be better off with the provision of conversion technology as this technology neutralizes the impact of network effects that would have otherwise been more potent. We discuss both the social and private implications of our findings.