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Gains from standardization: the case of numerical controls

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This paper tests the effects on consumer surplus and profits of standardizing a product from which consumers derive network externalities. Theory suggests that standardization would increase sales of the standardized product by enlarging the network of compatible products. If a country were to encourage standardization of its firms' products, domestic profits could increase even in foreign markets, making standardization a strategic trade policy. If domestic and foreign products are imperfect substitutes for one another, standardization of a domestic good, by increasing the price of the standardized good, increases sales and profits of the foreign incompatible goods. Consumer surplus increases regardless of the source of standardization because consumers benefit from the larger network. This paper studies the effects of the standardization of japanese numerical controls on the U.S. market for machining centers.

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