Justifying Standards by Net Benefit

The shift from 'market requirements' to 'market failure'

By Rick Jelliffe
April 11, 2010

Standards Australia has released their Net Benefit Guide (PDF). Net Benefit is one of the criteria they use for evaluating potential standards and standards projects. (Standards Australia is not a regulator, and its standards do not have force of law, thought many will find their way into being cited by regulation.)

What is particularly interesting is the move away from talking about supporting market requirements, which was the jargon common in the 1990s, towards talking about market failure as a primary justification for standards.

If any reader has any more information on this shift, I'd love to know more.

I would guess the move comes out of the political theory that public sector intervention is appropriate when (only when? at least when?) the markets have failed. It has long been a hot topic for economists: this Cato paper ends with a flourish, the hilarious example consider
a situation in which the Microsoft Corporation claims authority to imprison people it believed committed crimes on its property.
" (Cato's general angle is "There is no satisfactory normative theory regarding the appropriate roles of government in a mixed economy")

The impact would seem to be that (national) standards should not be developed in order to create markets ex nihilo, pro-actively, but should be essentially reactive. It seems a way to avoid blue-sky standards that may be academic exercise.

I expect that both ODF and OOXML would fit in, as two different strategies to approach the failed Office Suite market considered as a whole. However, I think ODF and OOXML standards are better justified by considering them as helping two different failed markets: the first being the market for middle-feature interoperable office applications, the second being the market for MS Office act-alikes and systems that need to integrate into them. The demanders in the first market is primarily public sector institutions, the demanders in the second market is primarily system integrators and industrial publishers.

The Guidelines prudently recognizes that Market Failure is not the only prism to view a proposal through:

Quantitative data should be used to illustrate the size and scope of impact of the Standard wherever possible.

It is important to consider the costs and benefits to all affected stakeholders and communities of interest - the Net Benefit is the sum total of all these costs and benefits. While a proposed Standard may have limited Net Benefit to the general public, there may be significant proportional costs or benefits to smaller communities of interest. Please identify any of these specific communities and the impact this proposal makes on them.

The absence of a Standard may also have significant impacts other than those easily identified as part of a Net Benefit case, including negative impacts on particular communities or the loss of potential opportunities.

But what would this test mean for the proposed ISO standard for ZIP file archives? The proximate motivation for a ZIP standard is perhaps not for market reform or market enabling, but for housekeeping: ISO standards that use ZIP like ODF and OOXML are supposed to only quote other standards normatively, but no ZIP specification exists in any form that remotely satisfies anyone's guidelines for a standard or open standard. But the current situation (a text file maintained by the good folk at PKZIP) has obviously been workable.

Would having to dream up some justification couched in terms of market failure be useful (to give the standards project a focus and use case) or bureaucratic?

Or what about ISO Schematron? It does not have a market, in the sense that it has some product sales in its own right. Like XML, and like SC34's other preferred enabling standards (i.e. infrastructure standards, not end-user standards like ODF and OOXML) Schematron can be used in almost any scenario where there is electronic data or document processing or interchange. Estimating the net benefit in any exact terms would be borderline fraud! What market failure does an enabling standard address?

And a slow-burn standard like Schematron has the additional problem that most adopters do not document their adoption until years later. (Similarly, one of the characteristics of Schematron is that regularly people prototype validation in Schematron then, once they have come to grips with the problem, they may address the issues in a better way, for example by preventing the problem at source.) So there is always a risk aspect to estimating Net Benefit.

However, I do see a danger in considering standards as a solution to Market Failure: standards are often useful rather than necessary, and helpful rather than sufficient. One thing we do know about standards is that the more there is not adequate buy-in from or participation by any significant group of stakeholders, the more that the standard run the risk of being irrelevant or skewed or, paradoxically, perpetrating further market failure. The obvious extreme example of these are what Martin Bryan has called standardization by corporation, where monopolies or oligopolies (cartels) promote their own feature sets, with their voice drowning out a broader range of stakeholders. (Where standards are made where one group's interests predominate, the only reasonable way to manage things is to allow a plurality of standards—a market for standards, in effect.) But a rubber-stamped standard (where vendors dominated) is often regarded as a success while an unimplemented standard (where non-vendors dominated) is regarded as a failure: I'd see both as failed opportunities, since the essence of a standard is broad agreement not empire-building.

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