Strategic IT Investments: The Impact of Switching Cost and Declining IT Cost
AbstractThe declining cost of information technology (IT) over time provides the later entrant in information-intensive industries a cost advantage. On the other hand, the earlier entrant has the potential to build and retain its market share if consumers incur a cost in switching to the later entrant. We investigate the impact of a decline in the IT cost and the switching cost on IT investment strategies of firms. We find that a declining IT cost always hurts the early entrant's profit. The early entrant may assume an aggressive investment strategy or a defensive investment strategy in response to a decline in the IT cost, depending on whether the switching cost relative to the extent of decline in the IT cost is high or low, respectively. A decline in IT cost also hurts the later entrant's profit if the switching cost is high. A surprising result is that when the decline in the IT cost is higher than a critical value, a higher switching cost increases consumer surplus. When firms control the switching cost, the early entrant increases its investment in quality and switching cost and maintains its quality and its market-share leadership irrespective of the extent of decline in the IT cost.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 53 (2007)
Issue (Month): 2 (February)
IT investment; late-mover cost advantage; declining IT cost; switching cost;
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- Claudio Vitari & Aurelio Ravarini, 2009. "A Longitudinal Analysis of Trajectory Changes in the Software Industry: The Case of the Content Management Application Segment," Post-Print hal-00462408, HAL.
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