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How much do consumer value interoperability? Evidence from the price of DVD players

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July 7, 2017

How much do consumer value interoperability? Evidence from the price of DVD players

Our study is designed to begin to investigate some propositions about why consumers might value interoperability when choosing to purchase devices or content. There are numerous reasons why that might be the case. For example, people might value backwards interoperability between a device and other devices or content they already own. In a famous economics paper, Farrell & Saloner (1986) suggest that there are barriers to adoption of a new standard caused by network effects related to the number of people using the old standard. For example, maybe one’s friends and family use one system and moving to a new system would leave an early adopter out on a limb. Or, maybe a consumer has invested a lot of money in content that is compatible with the old standard but incompatible with the new one. DRM might amplify those effects and result in ‘excess inertia’: that is, an overall loss to society caused by slower than optimal uptake of a new standard.On the other hand, consumers might not (only) make a purchase decision informed by goods that they or their friends already own. They may be more concerned with what we call forwards interoperability: the capability of a device to interface with future, unknown devices or content. Imagine for example a company pledging not to restrict their format to future innovators, enabling unintended new benefits to consumers as third-party companies supply complementary goods and content. This might interest consumers worried about ‘future-proofing’ their investment, ensuring that new content is likely to be created for their device.

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