The role of standard-setting organizations in deciding product quality and process innovation

Abstract

We analyze the effect that the presence of a standard-setting organization (SSO) has on firms' choices of product quality and costly research and development (R&D) investment when consumers face uncertainty regarding product standardization. We construct a theoretical model with competing firms and compare frameworks where: (i) an SSO is exogenously absent and (ii) an SSO is present. Our first finding is a negative relationship between firms' product-quality choices and R&D investment. The presence of the SSO standardizes quality which can be profitable for firms. Finally, we find conditions where the presence of an SSO could lead to welfare enhancement.