Standard-setting organizations (SSOs) are a very interesting species of man-made contractual arrangements: They are usually nonprofits, i.e. they do not sell products or services and distribute profits to their owners. However, in contrast to many other clubs, their members are not individuals but profit-maximizing firms, i.e. organizations themselves. Moreover, often these firms have very heterogeneous interests. For instance, often some members are (upstream) innovators with patented technologies, whereas other members are (downstream) implementers, who take out a license of diverse technologies and sell products to final consumers. According to common wisdom among organizational economists, such heterogeneity in objectives should deteriorate the efficiency of SSOs (see, e.g. here). Nevertheless, many SSOs fulfill crucial roles as intermediaries in innovative industries. This opens the question, how they manage to square the circle.
In a new working paper, “Membership, Governance, and Lobbying in Standard-Setting Organizations” (joint with Clemens Fiedler and Maria Larrain), we try to better understand the internal workings (aka governance) of SSOs. Specifically, inspired by recent empirical results, we construct a game-theoretic model, with which we study the incentives of heterogeneous innovators and implementers to join an SSO, which is endogenously formed. We also study the effect of SSO governance on membership incentives and on members’ lobbying efforts to get their technologies included in the standard. We show that, depending on parameter realizations, one of four equilibrium types arises uniquely. The results can reconcile existing evidence, especially that many SSO member firms are small. We show that raising the influence of implementers within the SSO increases the standard’s market coverage and lowers royalty rates but it erodes innovators’ incentives to contribute to the standard. We also show that both large innovators and large implementers have incentives to make the standard more inclusive, which decreases quality and damages smaller firms.