Bundled transactions of intellectual property: an explanation for the choice of governance form in the IT standard setting

In this thesis, I develop a contingency model to explain the factors affecting the transaction costs in the IT standard setting environment and how the choice of one governance form over the other moderates this effect. The aim is to understand what causes the transaction costs in the IT standard setting process and what governance form best mitigates these costs. The sub-objectives of this thesis are: To conceptualize and promote the intellectual property (IP) view of the technology standards; to identify different types of transaction costs involved in the IT standard setting process; to identify unique characteristics emerging from the IP view of the technology standard that affect the transaction costs; to show that these transaction costs, associated with transacting for intellectual property (IP), exist for all governance forms associated with the standards development process; and finally, to show that different governance forms moderate the effect of these unique characteristics on the transaction costs, making one governance form favorable over the other for a given set of circumstances.

To develop the model, I view IT standards as bundles of complementary IP (or methods) that are owned and controlled by multiple entities in multiple different locations and multiple different industries. To implement a standard necessitates transactions of IP between IP owners and standard implementers for the IP rights. However, these transactions are not simple. Due to the legal rights granted by the to the IP owner and the information asymmetry regarding their existence, there are substantial costs involved in locating and procuring the IP rights and later during the implementation of the IP due to infringement issues.

Three different transaction costs are considered: the search costs, the coordination costs, and the opportunism costs. The search costs are costs associated with identifying the necessary IP and the IP owner. The coordination costs are costs associated with procuring the IP by entering into negotiations and contracts with the IP owners. Opportunism costs are costs associated with IP infringement and other consequences arising out of IP laws. The unique characteristics, based on an IP view of standards, are identified as the complexity of the IT standard, geographical scope, industrial spread of the IT standard, and substitutability of a method in the IT standard. Complexity refers to the nature and number of interdependencies that exist between various methods that make up the standard. Geographic scope refers to the number of countries where the IP required for the standard may be held. Industrial spread refers to the different technical categories into which the IP may be classified. Finally, substitutability refers to the ability to substitute an IP in the bundle with the next best alternative without grossly affecting the functionality of the standard.

Two stylized governance forms considered in the study are hierarchies and networks. Hierarchies are characterized by a single firm (or a dominant firm and a few subservient partners) which controls the standard development process. Networks are characterized as a group of equals where the standard development process is controlled by multiple different entities.

The data were collected by surveying experts involved in IT standards development. A total of 436 people responded to the survey for a response rate of 32.0%. OLS regression and logistic regression were used to analyze the data. The results show that there are significant transaction costs for all governance forms. Hierarchies or smaller networks are less expensive than bigger networks to start but lose their edge with the increase in bundle characteristics. The results also suggest that the complexity and geographic scope are significant predictors of search costs, and bigger networks are better at moderating the effect of geographic scope on search costs. The industrial spread and geographic scope are found to be significant predictors of coordination costs, and bigger networks are better at managing the effect of complexity on coordination costs.

Finally, complexity is a significant predictor of opportunism cost, and bigger networks are better at moderating this cost than hierarchies. We also found that bigger networks are better at moderating the effect of substitutability on opportunism, and hierarchies are better at moderating the effect of geographic scope on opportunism. Thus, it is concluded that if there is more complexity in a standard and if easy substitutes for patents are not available, then networks are preferred over hierarchies, and in case the standard has larger geographical implications, then hierarchies are preferred over networks.