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A Better Mousetrap?

There is an old adage that if someone invents a better mousetrap, the world will beat a path to his door. Though it is repeated frequently, there is good reason to doubt its truth.1 The previous reading selections help us see the problems the mousetrap inventor may have.

First is the problem of information. How will the public know that this is in fact a better product? Information is not a free good, and even if the inventor spends money to announce his product, people may not believe his claims because of the signaling problem. Everyone can claim to have a better mousetrap, but how do we know which claims are valid?

A second problem that the inventor may have is that there can be a tyranny of standards. An example of this is the QWERTY keyboard. When typewriters were invented in the 19th century, a problem of early models was that they would jam when people typed too fast. A solution was to slow people down by making the keys harder to hit. So the "e" key, which is the most frequently used key, is not sitting ready to strike under an index finger, but requires one to lift a finger. It did not take long before typewriters were improved so the key-jamming from fast typing was eliminated. By that time, however, the QWERTY keyboard, designed to slow typists down, had become standard and it remains standard to this day.2 Economists have used the term network externality for situations of this type in which the value of a good or service rises as more people use it.

More efficient keyboards have been designed. Why do they not drive out QWERTY? If we look at the situation from the point of view of the individual typist, we see a situation that is very much like the problem of public goods. What is the cost and benefit of an individual learning a new keyboard? The advantage will be that this individual will type faster using the new keyboard. The disadvantage will be that it will be much harder for that individual to move from one keyboard to another. So even though the group may recognize that they should have a new standard, it is not in the interests of any one individually to do anything about it.

One of the oddities of a market with network externalities is that the marginal-benefit-to-buyer curve, which is one of the interpretations of a demand in curve in other markets, may rise rather than fall. In a typical market, some people value the product more than others, and if the price is set high, only those who value it the most will buy it. To get more people to buy the product, the price must come down. But consider the case of a product with network externalities, such as the video telephone or picture phone that AT&T tried to market many years ago. This product was not valuable unless a lot of others had it. Who would you talk to on this device if you were the only one who had one? When a product becomes more valuable as more people use it, its marginal benefit rises as the number of people using it increases. AT&T did not understand the economics of this product, and tried to introduce it with a high price, a strategy that can work with a normal product. AT&T might have been more successful if they had initially given away phones, and when the product had widespread so that it was actually useful, then started charging. This strategy was used by Paypal, which now dominates online payments among individuals. In its early days, the company gave anyone who signed up for an account $10 in the account, and if a person referred another person who signed up, the person doing the referring also received $10. Paypal recognized that in this market there was room for only one company, and the one that got big the fastest would be the winner.

There is a tendency for standards to persevere even when those standards are not the best. All they have to be is good enough. Why does the United States continue using miles instead of kilometers and Fahrenheit instead of Centigrade? Standards are hard to leave, even when there are better alternatives. Standards are also important in business. One place the importance standards are very apparent is in the computer industry. Once a software product becomes dominant, people tend to use it because everyone else is using it, and hence it is very difficult for other products to unseat it even when they are better. Why did Microsoft become the dominant software company of the 1990s? It succeeded because they understood the message of this page and planned their actions to take advantage of it.

By the way, mousetraps are unlikely to have network externalities.

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1This adage is attributed to Ralph Waldo Emerson, who has a number of claims to fame, but success as a businessman was not one of them.

2There is dispute about whether the QWERTY keyboard is really inferior. Studies have taken persons trained in QWERTY and seen whether they can be retrained to be faster in an alternative (Dvorak). Some of these studies have found little or no improvement. I remain skeptical of these results because I would like to see them compared to a study that takes people trained in the other keyboard and sees if they can be retrained to be as fast in QWERTY. As far as I know, no one has done this study. Certainly, if QWERTY were grossly inefficient, it would disappear. But if it is only mildly or moderately inferior to other systems, the argument about standards set out above says it will persevere. (Of course, somewhere in the future it may be rendered obsolete when we all talk to computers instead of type to them, but until them we will be stuck with QWERTY.)

Copyright Robert Schenk