Prisoners of Our Own Device – An Evolutionary Perspective on Lock-In, Technology Clusters and Telecom Regulation

Economic analysis of telecom-related issues often takes an essentially static equilibrium perspective, using comparative statics or moment-to-moment sequences of equilibrium behavior to model the development and impacts of technologies, economic behavior and regulation. Of course, much if not all of these developments occur far from equilibrium; this paper argues for resurrecting a more evolutionary perspective – in particular by taking account of dynamic rigidities. The models involved are not new – in the economic literature their formal development dates back at least to the work of David (1974), Desi (1982) Winter (1982), Arthur (1984) and Farrell and Saloner (1985). Taken together, these articles demonstrated the possibility of lock-in (especially to a given technology or supplier) in the presence of complementarities. A related thread in the game-theoretic literature analyses the evolution and stability of conventions, generally in coordination games. The implications for positive analysis are fairly straightforward; change is likely to be discontinuous and path-dependent, and (evolutionary) equilibrium outcomes are not necessarily optimal. This has equally straightforward implications for policy analysis and development; governance and regulation are periodically subject to by intentional or accidental change. Often, the intent of those participating in the change is to initiate, influence or set the seal on technical, economic and/or regulatory developments. Their deliberations are often sophisticated, taking account of the optimal responses of other stakeholders – but in the presence of rigidities, these assumptions about freedom of choice may not hold; the ability to recognize and respond to challenges is strongly path-dependent. This is particularly true in relation to markets with network externalities, which – as Katz and Shapiro (1992, 1994) observed - tend towards ‘tipping’ into monopoly and polarization of responses to innovation between excess inertia (lock-in to incumbent technology) and excess volatility (rushing to the ‘next big thing’). These phenomena are not limited to specific interoperability concerns identified by early authors in the field