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Returns to adoption and the emergence of dominant designs

Three essays examine how increasing returns and standardization affect the emergence of dominant designs in the wake of innovation. The first essay (Chapter 2) links the innovation and economics literature with regard to how significant innovation in open production systems is accomplished. Though the innovation literature has regarded the firm as the locus of innovation, systems where a number of firms manufacture components only are common. Generating significant performance improvements in such systems requires that firms either use the market to develop a de facto standard or coordinate development. I argue de jure standards are explicit governance forms for coordination. I also examine the role o f limited scope consortia in the development and passage of de jure standards when institutional failure is anticipated. In the second essay (Chapter 3), I contrast real options and transaction cost perspectives on when firms in the ITC industry make acquisitions. I argue that if firms are using a real options approach to acquisition, the timing should coincide with the resolution of uncertainty regarding technological outcomes. Conversely, transaction cost economics would suggest earlier acquisition while uncertainty is high. These are tested through data gathered on acquisitions o f hardware producing firms in the ITC industry for 1995-2000. The effects o f equity investment, nonequity alliance and joint membership in industry alliances and limited scope consortia are included. I conclude that the transaction cost framework better explains the pattern o f acquisitions but that framing the definition o f an option differently may reconcile the theories. The third essay (Chapter 4) develops a simulation to examine if and when innovation adoption occurs. I include market uncertainty, scope of returns to adoption, firm size and relative knowledge overlap with innovators as factors in the simulation. I find that firm size and overlap are strong predictors o f adoption timing and that as returns to adoption increase, adoption may be deferred. At the industry level, the likelihood of new technology replacing old is strongly related to the scope of returns and when the first adoption occurs. Also, smaller innovators are more likely to win if theirs is the first technology adopted.