| dc.description.abstract | Abstract
Economic analysis of the standardization choice mostly focuses on the firm’s incentive to be compatible with other competing foreign standards or otherwise.
On the other hand, the issue why a foreign standard first came into being was always left unanswered. Gandal and Shy（2001）made the first attempt to explain the origin of international standard. In their view, the presence of international standards sometimes can be traced to the strategic motive intended to enhance total national welfare by sovereign governments. They employed a three-country, three-variety world economy model as a framework to analyse this kind of “strategic” standardization policy. (The term “strategic” is added to be compared to the once popular strategic trade theory in 1980’s) In this article a similar simple three-country, three-variety world economy model is developed to see what kind of endogenous standardization policy would be adopted by each government assuming exogenously there exists a great product heterogeneity, a feature that distinguishes this model from the one assuming horizontal product differentiation developed by Gandal and Shy. It is found that the conditions affecting governments’ policy decision indeed make a stark contrast once vertical quality difference is taken into consideration. In the first place, when each government is restricted to recognizing either all or none of the foreign standards, our model shows that given the conversion cost is very small（C≦0.36 when C=3.5 would leave no any positive market demand even for the highest quality firm）, every country’s best response is not to recognize any foreign standards. On the contrary, Gandal and Shy prove that if the conversion cost is not so large as to eliminate all market demands, all country’s dominate strategy is to recognize every foreign standard. Second, our model finds that for small and moderately small conversion costs（C≦0.18 or C≦1/3, when C=0.7 drives out all the positive demand even for the highest quality firm）, a standardization union would come into existence either between the H and the M country or between the M and the L country whereas Gandal and Shy point out in their article only a moderately large conversion can give rise to the formation of a standardization union between any pair of the countries in their model. So for a world economy where the production technologies are unevenly distributed, we predict that some kind of standard war occur only when the conversion costs are quite small instead of being moderately large as demonstrated by Gandal and Shy. | en_US |