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Electronic Data Interchange: Competitive Externalities and Strategic Implementation Policies

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Author Info

  • Eric T. G. Wang

    (Department of Information Management, School of Management, National Central University, Chung-Li, Taiwan 320, Republic of China)

  • Abraham Seidmann

    (William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, New York 14627)

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    Abstract

    Electronic Data Interchange (EDI) is an emerging type of standardized inter-organizational information system. We analyze the impact of EDI on the upstream suppliers' competitive position in a simple two-level hierarchical market structure where the buyer faces a linear demand curve and the competing heterogeneous suppliers have an upward-sloping marginal cost function. We show that a suppliers' adoption of EDI can generate positive externalities for the buyer and negative (or competitive) externalities for other suppliers. As a result, the buyer provides a price premium to those suppliers who adopt EDI and increases their sales volume and market share. Moreover, when the benefits that the buyer can derive from implementing EDI are substantial, and the suppliers' EDI adoption costs are high, it may be in the buyer's best interest to subsidize the suppliers so as to encourage them to adopt EDI, instead of mandating them to do so. Regardless of whether the buyer employs a mandatory or a subsidizing policy, the buyer and the end consumers may be the only ones who gain from this new technology. Consequently, a partial adoption by the supplier base may be optimal for the buyer when the suppliers' adoption costs are sufficiently high. We also show that, while EDI reduces the transaction costs of the buyer, the upstream market tends to become more concentrated as a result of increased cost differentials. These results provide one economic explanation of the fact that many companies have actually reduced their supplier base after implementing EDI, despite a significant reduction in their market transaction costs.

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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 41 (1995)
    Issue (Month): 3 (March)
    Pages: 401-418

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    Handle: RePEc:inm:ormnsc:v:41:y:1995:i:3:p:401-418

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    Web page: http://www.informs.org/
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    Related research

    Keywords: electronic data interchange; competitive externalities; EDI adoption; implementation policies of interorganizational information systems;

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    Cited by:
    1. Bhatt, Ganesh D. & Stump, Rodney L., 2001. "An empirically derived model of the role of IS networks in business process improvement initiatives," Omega, Elsevier, vol. 29(1), pages 29-48, February.
    2. Raghunathan, Srinivasan, 2003. "Impact of demand correlation on the value of and incentives for information sharing in a supply chain," European Journal of Operational Research, Elsevier, vol. 146(3), pages 634-649, May.
    3. Argenton, C. & Prüfer, J., 2012. "Search engine competition with network externalities," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5117898, Tilburg University.
    4. Sang Lee & Seong-bae Lim, 2007. "Factors influencing suppliers’ participation in private electronic markets," Service Business, Springer, vol. 1(1), pages 41-62, March.
    5. Brian Mittendorf & Jiwoong Shin & Dae-Hee Yoon, 2013. "Manufacturer marketing initiatives and retailer information sharing," Quantitative Marketing and Economics, Springer, vol. 11(2), pages 263-287, June.
    6. Taihyeong Lee & Patricia Mokhtarian, 2008. "Correlations between industrial demands (direct and total) for communications and transportation in the U.S. economy 1947–1997," Transportation, Springer, vol. 35(1), pages 1-22, January.
    7. Mahajan, Jayashree & Vakharia, Asoo J., 2004. "Determining firm-level IT investments to facilitate value chain activities: Should spillovers accruing to value chain members be incorporated?," European Journal of Operational Research, Elsevier, vol. 156(3), pages 665-682, August.

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