Open standards, closed standards or vertical integration? Interoperability pathways in markets with network effects
DOI:
https://doi.org/10.59490/jos.2026.8038Keywords:
standardisation, interoperability, market concentration, market adoption, competitive landscape, network effectsAbstract
Today, an increasing number of markets can be characterised as network markets. Stakeholders may feel incentives to pursue vertical integration in the value chain to achieve interoperability and to capture the network effects characteristic of these markets. Yet, technical standards offer opportunities to open such markets, cater for diversity, support competition, enable specialised roles in the value chain, and offer more opportunities for market entry. However, this might not always align with firms’ strategies. This paper examines the effects of different interoperability strategies on the competitive landscape and market adoption of these technologies through four case studies: electric vehicles, game consoles, payment systems, and home computers. We find that open standards are most successful when suppliers of complementary products have sufficient incentives to participate, enabling greater competition and broader market adoption. When such incentives are weak, complementary assets are underprovided or absent, vertical integration can be effective in getting the market started, even if it might initially lead to market concentration. Over time, however, network externalities typically push firms to open critical parts of their value chains to expand their networks and benefit from a larger market. In the long run, open standards thus tend to offer the most advantageous pathway to interoperability. Their successful adoption, however, often requires strong commitment by a dominant player or through regulatory intervention to ensure the provision of critical complementary assets.
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