The paper by Joseph Farrell and Garth Saloner analyzes the dynamics of standardization, compatibility, and innovation in industries. It explores how firms' decisions to adopt new technologies can be influenced by network externalities, coordination problems, and the potential for "excess inertia" or "excess momentum" in switching technologies. The authors present a model where firms sequentially decide whether to adopt a new technology, and show that even if all firms would benefit from switching, they may not do so due to coordination issues and incomplete information. The paper distinguishes between two types of inertia: symmetric inertia, where all firms are equally in favor of switching but fail to act, and asymmetric inertia, where some firms prefer the switch while others do not. The authors also examine how communication between firms can affect these outcomes, showing that public announcements can reduce symmetric inertia but may increase asymmetric inertia. In a model with complete information, the authors show that if all firms prefer the switch, they will all adopt the new technology. However, with incomplete information, firms may not switch even if it would be beneficial for the industry as a whole. The paper also considers the role of dominant firms in manipulating market structure by switching technologies, which can lead to increased concentration and profits for the dominant firm at the expense of competitors. The authors conclude that while standardization can provide important social benefits, it can also lead to inefficiencies due to coordination problems and inertia. They suggest that communication and better information can help mitigate these issues, but they also note that some forms of inertia may persist even with such measures. The paper highlights the importance of understanding the incentives and behaviors of firms in industries where compatibility and standardization play a significant role.The paper by Joseph Farrell and Garth Saloner analyzes the dynamics of standardization, compatibility, and innovation in industries. It explores how firms' decisions to adopt new technologies can be influenced by network externalities, coordination problems, and the potential for "excess inertia" or "excess momentum" in switching technologies. The authors present a model where firms sequentially decide whether to adopt a new technology, and show that even if all firms would benefit from switching, they may not do so due to coordination issues and incomplete information. The paper distinguishes between two types of inertia: symmetric inertia, where all firms are equally in favor of switching but fail to act, and asymmetric inertia, where some firms prefer the switch while others do not. The authors also examine how communication between firms can affect these outcomes, showing that public announcements can reduce symmetric inertia but may increase asymmetric inertia. In a model with complete information, the authors show that if all firms prefer the switch, they will all adopt the new technology. However, with incomplete information, firms may not switch even if it would be beneficial for the industry as a whole. The paper also considers the role of dominant firms in manipulating market structure by switching technologies, which can lead to increased concentration and profits for the dominant firm at the expense of competitors. The authors conclude that while standardization can provide important social benefits, it can also lead to inefficiencies due to coordination problems and inertia. They suggest that communication and better information can help mitigate these issues, but they also note that some forms of inertia may persist even with such measures. The paper highlights the importance of understanding the incentives and behaviors of firms in industries where compatibility and standardization play a significant role.