An excerpt from Information Rules
By Carl Shapiro and Hal R. Varian

A more instructive example of standards battles involves the history of railroad gauges in the United States during the nineteenth century.

As railroads began to be built in the early nineteenth century, tracks of varying widths (gauges) were employed. Somewhat arbitrary early choices had major, lasting impacts. One of the first railroads in the South, for example, the South Carolina, picked 5-foot gauge tracks. Over time, other railroads all over the South followed suit. In the North, by contrast, the “Standard” gauge of 4’8½”, popular in England for mining, was common. Evidently, this was about the width of cart track in Roman times, being the most efficient width of a loaded vehicle that could be pulled by a flesh-and-blood (not iron) horse. The persistence of the 4’8½” gauge, which now is standard in the United States, is a good reminder that inertia is a powerful and durable force when standards are involved and that seemingly insignificant historical events can lead to lasting technological lock-in.

By 1860, seven different gauges were in use in America. Just over half of the total mileage was of the 4’8½” standard. The next most popular was the 5-foot gauge concentrated in the South. As things turned out, having different gauges was advantageous to the South, since the North could not easily use railroad to move its troops to battle in southern territory during the Civil War. Noting this example, the Finns were careful to ensure that their railroads used a gauge different from the Russian railroads! The rest of Europe adopted a standard gauge, which made things easy for Hitler during World War II: a significant fraction of German troop movements in Europe were accomplished by rail.

Despite these examples, standards are generally socially beneficial, since they allow for easy “interconnections” and thus larger networks. But private interests can diverge from social interests. Battles over which standard to set, or whether there should be a standard at all, are common. Such battles can be severe, if not bloody, when there are entrenched users on both sides with high switching costs, when it is difficult for the various users to coordinate, and when some industry standardization faced three major obstacles: (1) it was costly to change the width of existing tracks, (2) each group wanted the others to make the move, and (3) workers whose livelihoods depended on the incompatibilities resisted the proposed changes. In 1853 in Erie, Pennsylvania, where three different widths of railroad track met, there were riots over plans to standardize: workers were fearful of losing their jobs associated with loading and unloading cargo and jacking up cars to change their wheels.

Nonetheless, standardization was gradually achieved between 1860 and 1890. How? The westward expansion provided part of the answer. The big eastern railroads wanted to move western grain to the East and pushed for new lines to the West to be at standard gauge. Since the majority of the eastbound traffic terminated on their lines, they got their way. The Civil War played a role, too. The Union had pressing needs for efficient east-west transportation, giving further impetus for new western lines to be built at standard gauge. The Civil War and westward expansion interacted as well. In 1862, Congress specified the standard gauge for the transcontinental railroads. By this date, the southern states had seceded, leaving no one to push for the 5-foot gauge. After the war, the southern railroads found themselves increasingly in the minority. For the next twenty years, they relied on various imperfect means of interconnection with the North and West: cars with a sliding wheel base, hoists to lift cars from one wheel base to another, and, most commonly, a third rail.

Southern railroad interests finally met and adopted the standard gauge in 1886. On two days during the spring of 1886, the gauges were changed, converting the 5-foot gauge into the now-standard 4’8½” gauge on more than 11,000 miles of track in the South to match the northern standard. A belated victory for the North!

Many of the lessons from this experience remain relevant today.

• Incompatibilities can arise almost by accident, yet persist for many years.
• Network markets tend to tip toward the leading player, unless the other players coordinate to act quickly and decisively.
• Seceding from the standard-setting process can leave you in a weak market position in the future.
• A large buyer (such as the U.S. government) can have more influence than suppliers in tipping the balance.
• Those left with the less popular technology will find a way to cut their losses, either by employing adapters or by writing off existing assets and joining the bandwagon.

We will see these themes over and over again in current-day standards battles.

About the Authors
Carl Shapiro is the Transamerica Professor of Business Strategy at the Haas School of Business at UC Berkeley. He also holds a joint appointment with the Department of Economics. His research involves strategic behavior in high technology industries.

Hal R. Varian is the Dean of the School of Information Management and Systems at UC Berkeley, and the Class of 1944 Professor. He also holds joint appointments with the Haas School of Business and the Department of Economics. His research involves the economics of information technology.

This article is an excerpt from Chapter 7 of Information Rules written by Carl Shapiro and Hal R. Varian, and is being used by RAILROAD.NET with permission from the authors. Copyright ©1999 Carl Shapiro and Hal R. Varian.