Evolving technologies and standards regulation

- A single standard leads to a free riding problem, thus to lower R&D incentives.
- Keeping two separate standards may be a necessary evil to sustain R&D.
- A non-standardization equilibrium may lead to higher consumer welfare.

The EU mandated a single standard for second generation wireless telecommunications, whereas the US allowed several incompatible standards to battle for market share. Motivated by this example, we argue that a single standard leads to a free riding problem, and thus to a significant decrease in marginal incentives for R&D investment. In this context, keeping two separate standards may be a necessary evil to sustain a high level of R&D expenditures. We also provide conditions such that a non-standardization equilibrium is better for consumers and for society as a whole.