Coordination through Committees and Markets with Option Timing Games

Abstract We use game-theoretic real options to analyse two mechanisms for the adoption of industry compatibility standards in situations of conflict. Conflicts arise if the players believe that adoption by the industry of one particular standard is best for all but they each have a vested interest in their own preferred standard. We examine the two main coordination mechanisms for standard adoption: one focuses on achieving consensus via negotiation within committees while the other is via the market when one player unilaterally adopts and expects his competitors to follow suit. A key question is which mechanism performs better. Another is when should a participant take the lead and unilaterally adopt a particular standard despite the possibility of an uncoordinated outcome arising. This paper addresses these questions by deriving equilibrium strategies for both mechanisms. We show that by considering the problem as a real option timing game, a comparison of the mechanisms to help inform which performs best cannot provide a definitive answer because it depends on each of the participants’ expected payoffs from unilateral adoption and concession at any given time. Furthermore, the equilibrium expected payoffs in each of the mechanisms are equivalent.