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The literature has identified two types of network effects. Direct network effects have been defined as those generated through a direct physical effect of the number of purchasers on the value of a product (e.g. fax machines). Indirect network effects are “market mediated effects” such as cases where complementary goods (e.g. toner cartridges) are more readily available or lower in price as the number of users of a good (printers) increases. In early writing, however, this distinction was not carried into models of network effects. Once network effects were embodied in payoff functions, any distinction between direct and indirect effects was ignored in developing models and drawing conclusions. However, our 1994 paper demonstrates that the two types of effects will typically have different economic implications. It is now generally agreed (Katz and Shapiro, 1994) that the consequences of internalizing direct and indirect network effects are quite different. Indirect network effects generally are pecuniary in nature and therefore should not be internalized. Pecuniary externalities do not impose deadweight losses if left uninternalized, whereas they do impose (monopoly or monopsony) losses if internalized. An interesting aspect of the network externalities literature is that it seemed to ignore, and thus repeat, earlier mistakes regarding pecuniary externalities. (For the resolution of pecuniary externalities see Young (1913), Knight (1924), and Ellis and Fellner (1943).)

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Any one have suggestions for what else to call that? There must be a word for this already. I hate to be novel if I can avoid it.

Say I’ve got a Playstation 3, which is really wizzy at doing 3D visualisations. And I’ve been doing some modelling/visualisation of how Malaria parasites manage to infect human cells; or whatever Bill and Melinda’s Foundation is up to.

And I want to include it in my document, and communicate it with the scientists I’m working with so we can discuss whether the model reflects real life; whether we’re on the way to developing a pharmaceutical to fix the problem.

I’ve got a Playstation. You’ve got a Lenovo. He’s got an XBox.

Really nice if we can all interoperate. Then we can make progress.

The real problem here is that MS’s OOXML format, as documented, isn’t really a standard. It’s part of a product, and the only full implementation is likely to be from Microsoft … In fact there are some questions about the legality of a full Non-MS implementation.

As I see it, the biggest problem with MS’s OOXML specification is that it’s incomplete, and — even if it were completely documented — a full implementation would be a complete pig. More than that, there’s no real promise that — even if it’s accepted accepted as an ISO standard, MS would even stay with(in) the specification as documented.

Just for reference, my custom shoes cost $460 all told. About $60 was for the design sewn into the leather and there was perhaps $20 for the shipping charge. They were molded to casts of my feet, so they fit me exactly. I was told by another leatherworker that those prices were very, very good if not cheap and he confirmed that their quality is excellent. They were made by a husband & wife team who operate their own business doing this.

So yeah, shoes would be a LOT more expensive without standards (although I really like mine).

But there will still be winners and losers. Remember the ladies of Erie, Pennsylvania, tearing up the new standard gauge railroad tracks because the standardization of gauge at this junction would cause their husbands high paid jobs loading and unloading cargo between incompatible tracks to disappear.

Standardization increases competition, and will be opposed by those who are unable or unwilling to compete.

This is an easy one. You design your standard around an extensible foundation that can dynamically grow a suite of innovative specifications over time. With this model you don’t have a single monolithic standard that freezes everything in stone. You have a suite of standards that grow in capability over time. You even have the capability to drop obsolete/failed specifications and replace them with something better.

An example is TCP/IP. The IETF adds new RFCs every year. The IEEE does the same with the 802 series of standards at the physical/data link layers. There is no shortage of innovation in networking but there is no shortage of immature technologies either.

Another example is the world wide web. The W3C consortium has successfully extended the web protocols over the years with muliple successive specifications. There is no shortage of innovation in the web. The major inhibitor is Microsoft because they don’t implement in IE the standards they don’t feel like implementing. As a result, web operators don’t use new standards by fear of shutting their audience off their sites.

Both examples are comparable to the document formats. XML is clearly a suite developped according to this model and ODF is meant to fit in nicely. The innovation inhibitor is Microsoft. They implement only the portion of the XML suite they feel like implementing using their usual embrace and extend strategy.

Incidentally, I am not sure whether file formats are comparable to the examples you mention. With the exception of digital TV, these–time, fire hose couplings, razors–are all mature technologies.

The fact that office document formats, e.g. DOC, have not changed in many years does not mean that the technology is ripe. It could also stem from the innovation-quashing effects of a monopoly. New document standards could help weaken this monopoly and thus spur innovation–there is still TONS of room for innovation in electronic documents. Yet, at the same time, standards often stifle innovation!

Does anybody have ideas for how to resolve this contradiction?

Discussing the benefits of true standards is a much better way to promote ODF than arguments about why the alternative won’t be adopted. The point you bring are pretty exhaustive and help clarify my own mind.

Will you have something to say on standard suites like TCP/IP and XML? Some standards will deliver their benefits only when they come in a suite of related but independently written specifications. I think TCP/IP, PSTN and also television signals for example.

It is not publicized that XML is actually such a suite of standards. Its promises will be fulfilled only if a reasonably complete implementation of the suite is available. Microsoft picks and choose the elements on the suite it wants and this tactics leads to “intraoperability” as opposed to interoperability as Bob Sutor puts it. But Microsoft still claim XML support and this is a bit deceptive.

It is like someone claiming to support TCP/IP without supporting the routing protocols like RIP, OSPF and BGP. End devices can connect to such network but routing devices are kept proprietary. This is a trap Cisco did *not* fall into. Cisco provides a proprietary routing protocol, but they also support the standard ones. Therefore users that want to be fully standard can be and those that like the proprietary solution can still interface with standard compliant networks.

I have a minor nitpick about the following statement: “The free market is good at many things, but the complex conversion of an entire network of diverse and competing producers and consumers at many levels is not something it has the agility to accomplish.”

In the example you give there is no positive business case for the TV stations because digital TV, especially HDTV, has higher production costs, higher bandwidth consumption, huge transition costs and brings no additional revenue. This is why the market does not move of its own volition.

Complex transitions did occur from market forces in the past, for example the transition from black and white to color TV, transition from over-the-air TV to cable TV and the transition from X.25 and serial lines to TCP/IP networking. Witness also the currently on-going transition from PSTN to VoIP.