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Teaching notes for chapter 17

This is the most innovative chapter in the book (innovative with respect to standard IO presentations). The field of economics of networks and standards has developed over the past 15 years or so, and is only gradually making its way into textbooks. The number of industries with direct or indirect (a.k.a. virtual) network effects is extremely large. This is especially true among high-tech industries. The treatment of networks and standards in a separate chapter is therefore amply justified.

In strategy-oriented courses, a special emphasis should be put on the topic of strategic compatibility decisions. Although the economic analysis has still not settled on this issue, this is a very important issue from the point of view of strategy, in fact one where new examples keep constantly coming up (witness the recent DVD battles).

From the point of view of public policy, the fundamental issue is the role of the government in the process of standardization. The text refers to an important real-world case study: the contrast between the European approach and the U.S. approach to standardization in wireless telephony (second and third generation). This is a process that is still not over; it may therefore be interesting to follow the recent developments in it.

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