9781118041581

so-called Blu-ray format. The opposing side, led by Toshiba Corporation and

backed by NEC Corporation and Microsoft, developed the HD format. Each for-

mat had its advantages, but each was incompatiblewith the other. For more than

two years, the corporate players formed alliances and pushed their preferred for-

mats. The Blu-ray group enlisted movie studios like Twentieth Century Fox and

Walt Disney. The HD group counted NBC and Universal studios in its camp, and

studios such as Warner Brothers and Paramount Pictures pledged to release

movies in both formats. Negotiations concerning the standards dispute were

overseen by the DVD forum, an industry group made up of some 200 corporate

members. However, there was no resolution in sight. The sales of the new DVD

players and DVDs lagged; consumers were put off by high prices and, more

importantly, by the risk that they might be left with an abandoned technology.

Table 10.4 shows the (hypothetical) payoffs to the two opposing camps

associated with the competing standards. Not surprisingly, the Sony group’s

greatest payoff occurs if all sides adopt the Blu-ray format, whereas the Toshiba

group’s greatest payoff comes with the HD format. However, coordinationis cru-

cial. Both sides receive much lower payoffs if different, incompatible tech-

nologies are chosen (the off-diagonal entries).

The payoff table in Table 10.4 has two equilibria: Both adopt the Blu-ray for-

mat (upper-left cell), or both adopt the HD format (lower-right cell). Each is an

equilibrium because if one side adopts a given format, the best the other can do

is follow suit. (Check this.) Coordination on a common standard is in each side’s

own best interest. The catch is that the sides have strongly opposed views on which

standard it should be. We would expect the outcome to be one of the equilibria—

but which one? That is a matter of bargaining and staying power. In general,

rational bargainers should agree on a common standard, but such an agreement

is far from guaranteed as evidenced by the actual bitter and protracted dispute.

The HD DVD standards dispute was finally resolved in early 2008. The Blu-

ray standard emerged as the winning standard due to a cumulative series of

factors. First, Sony installed Blu-ray players in its Play Station 3 game consoles

and so attracted video gamers. Second, it gained additional purchase by swaying

412 Chapter 10 Game Theory and Competitive Strategy

TABLE 10.4

The Battle for a

Common Technology

Standard

The two equilibria

have both sides adopt-

ing the Blu-ray format

or both sides adopting

the HD format.

Toshiba Group

Adopt Blu-ray Adopt HD

Format Format

Adopt Blu-ray

Format

100, 50 30, 20

Sony Group

Adopt HD

Format 0, 0 60, 90

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