Interoperability in the ICT sector

The research project explores the benefits and risks generated by enhanced interoperability between different information and communication technologies (ICT). In particular, the CDS team carries out a comprehensive review of the economic literature on interoperability to identify risks and benefits of enhanced interoperability in the ICT sector.

Interoperability between different hardware and software holds profound economic implications in the ICT sector, by reshaping market structures, investment incentives, and social welfare.

On the benefits side, seamless interoperability lowers transaction costs and diminishes vendor lock-in, fostering competitive entry, innovation diffusion, and positive network externalities as users and complementary developers can more readily join and expand a shared technological ecosystem.

Standardised protocols also reduce duplication of R&D expenditure and accelerate economies of scale, generating consumer surplus through lower prices and greater product variety. Conversely, interoperability poses risks: poorly governed open interfaces can amplify security externalities—where a vulnerability in one platform propagates across interconnected systems—undermining overall system reliability.

Secondly, the coordination required for establishing common standards can lead to “standards wars” or fragmentation when firms strategically withhold cooperation to preserve market power, ultimately raising the risk of under-investment in bespoke features and dampening long-term innovation incentives.

Thirdly, premature standardisation in an area where the technology has the potential to rapidly evolve may inhibit innovation by locking in the status quo.

Fourthly and relatedly, an obligation for full interoperability tends to dilute the economic incentive of the firms in the technological lead to innovate because it makes it more difficult for them to exploit the advantages that flow from their innovation.

This project receives funding from the Market Donors of the Centre for a Digital Society.