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The Handbook of Technology and Innovation Management by Scott Shane

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9.3. Standards and Standardization

9.3.1. Economic costs and benefits of standardization

Standards are interesting from an economic and strategic standpoint because many markets face a strong trend toward standardization – the adoption of a common specification for a standard by consumers and/or firms. Put simply, standardization can generate significant economic benefits for market participants. There are also costs associated with standardization. In this section, we discuss the variety of economic factors driving these benefits and costs. Understanding what these factors are and how they spur (or hinder) standardization is critical to understanding how market processes may or may not function efficiently in their choice of standards.

Scale economies. Standards may reduce the economic costs of large-scale production. For example, automobile tires are standardized across similarly-sized automobiles produced by different firms. This reduces average production costs at any given firm and avoids duplicate design expenditures. There are a wide variety of standards (in markets other than automobile parts) that transparently serve this purpose. For example, this motive is a key driver of standardized IT installations by large businesses. The standardization eliminates the differences between installations in distinct locations, ultimately reducing the fixed costs of operation.

The desire to achieve scale economies does not necessarily engender a demand for standardized technologies ...

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