Many important technologies share two features: they are embodied in durable goods and training, and they are subject to network externalities where each user's benefit from using the system increases with the number of other users adopting compatible systems. Often, it is not easy to introduce new, improved technology while retaining full compatibility with the installed base without compromising performance. Frequently, at issue is when should society switch from an established technology to an incompatible, but superior alternative; and how if it all, should the transition be managed. Examples of such transitions include the shift from LPs to compact disks, the change from DOS to OS/2 or Unix in personal computers, the change from black and white to color TV, and the impending transition to high definition TV. The purpose of this research is to analyze the transition from one generation of technology to the next in markets where network externalities make it desirable or essential for users to coordinate and adopt products that are compatible. The research focuses on the problems faced in making a centralized choice of a new technology. Such centralized choice may be made by government or a voluntary standard-setting organization, as is frequently the case. For a given mew technology, the investigators will analyze the path of consumer adoption following standard-setting, the effects of granting strong or weak intellectual property protection, and the timing of standard-setting and technology introduction. In addition, the principles involved in choosing among competing systems will be analyzed in light of uncertainty about improvements likely to be achieved over time and the ultimate cost of rival systems.
