Coalition Formation in Standard-Setting Alliances

We present a theory for predicting how business firms form alliances to develop and sponsor technical standards. Our basic assumptions are that the utility of a firm for joining a particular standard-setting alliance increases with the size of the alliance and decreases with the presence of rivals in the alliance, especially close rivals. The predicted alliance configurations are simply the Nash equilibria, i.e., those sets of alliances for which no single firm has an incentive to switch to another alliance. We illustrate our theory by estimating the choices of nine computer companies to join one of two alliances sponsoring competing Unix operating system standards in 1988.