IDEAS home Printed from https://ideas.repec.org/a/inm/orisre/v29y2018i1p70-83.html
   My bibliography  Save this article

When Ignorance Can Be Bliss: Organizational Structure and Coordination in Electronic Retailing

Author

Listed:
  • Dengpan Liu

    (School of Economics and Management, Tsinghua University, 100084 Beijing, China)

  • Yong Tan

    (Michael G. Foster School of Business, University of Washington, Seattle, Washington 98195; School of Economics and Management, Tsinghua University, 100084 Beijing, China)

  • Vijay Mookerjee

    (Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75083)

Abstract

This study examines coordination issues that occur between the marketing department and the information technology (IT) department in electronic retail settings. We consider a marketing department that is responsible for choosing the level of advertising to generate traffic to the firm’s website and an IT department that is responsible for choosing IT capacity to provide web visitors a satisfactory experience. The focus here is to examine how duopolistic advertising competition among firms can affect the organizational structure (centralized or decentralized) within each firm. In essence, our interest lies in the question: How does the presence of interfirm competition affect intra-firm coordination (i.e., organizational structure)? As a benchmark, we develop and solve a centralized decision model wherein the levels of advertising and IT capacity are jointly chosen in each firm to maximize profit. This is compared with a decentralized decision model in which the marketing department could potentially advertise suboptimally because its assessment of IT factors (the served traffic rate) is inaccurate. We find that competition can lead to a decentralized equilibrium in which both firms choose not to coordinate among their internal departments. More importantly, we find that when marketing moderately underestimates IT service quality, coordination results in a prisoners’ dilemma (PD) equilibrium for each firm whereas decentralization is socially optimal but with an off-equilibrium outcome (resulting in higher profits for each firm). That is, the conventional wisdom that “more coordination is good” could push firms toward a PD equilibrium when they can both be better off by not coordinating internally in the face of competition. This result also implies that if marketing tends to underestimate the capabilities of the IT department, it may be better to encourage such firms to coordinate less rather than encouraging them to coordinate more. The online appendix is available at https://doi.org/10.1287/isre.2017.0725 .

Suggested Citation

  • Dengpan Liu & Yong Tan & Vijay Mookerjee, 2018. "When Ignorance Can Be Bliss: Organizational Structure and Coordination in Electronic Retailing," Information Systems Research, INFORMS, vol. 29(1), pages 70-83, March.
    • Handle: RePEc:inm:orisre:v:29:y:2018:i:1:p:70-83
    DOI: isre.2017.0725
    as

    Download full text from publisher

    File URL: https://doi.org/isre.2017.0725
    Download Restriction: no
    File URL: https://libkey.io/isre.2017.0725?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Wang, Qinan & Wu, Zhang, 2001. "A duopolistic model of dynamic competitive advertising," European Journal of Operational Research, Elsevier, vol. 128(1), pages 213-226, January.
    2. A. Prasad & S. P. Sethi, 2004. "Competitive Advertising Under Uncertainty: A Stochastic Differential Game Approach," Journal of Optimization Theory and Applications, Springer, vol. 123(1), pages 163-185, October.
    3. Kenneth R. Deal, 1979. "Optimizing Advertising Expenditures in a Dynamic Duopoly," Operations Research, INFORMS, vol. 27(4), pages 682-692, August.
    4. Mesak, Hani I. & Calloway, James A., 1995. "A pulsing model of advertising competition: A game theoretic approach, part B -- Empirical application and findings," European Journal of Operational Research, Elsevier, vol. 86(3), pages 422-433, November.
    5. Gila E. Fruchter, 1999. "The Many-Player Advertising Game," Management Science, INFORMS, vol. 45(11), pages 1609-1611, November.
    6. Mesak, Hani I. & Calloway, James A., 1995. "A pulsing model of advertising competition: A game theoretic approach, part A -- Theoretical foundation," European Journal of Operational Research, Elsevier, vol. 86(2), pages 231-248, October.
    7. Gary M. Erickson, 2009. "Advertising Competition in a Dynamic Oligopoly with Multiple Brands," Operations Research, INFORMS, vol. 57(5), pages 1106-1113, October.
    8. Gila E. Fruchter & Shlomo Kalish, 1997. "Closed-Loop Advertising Strategies in a Duopoly," Management Science, INFORMS, vol. 43(1), pages 54-63, January.
    9. Prasad A. Naik & Ashutosh Prasad & Suresh P. Sethi, 2008. "Building Brand Awareness in Dynamic Oligopoly Markets," Management Science, INFORMS, vol. 54(1), pages 129-138, January.
    10. Yong Tan & Vijay S. Mookerjee, 2005. "Allocating Spending Between Advertising and Information Technology in Electronic Retailing," Management Science, INFORMS, vol. 51(8), pages 1236-1249, August.
    11. Frank M. Bass & Anand Krishnamoorthy & Ashutosh Prasad & Suresh P. Sethi, 2005. "Generic and Brand Advertising Strategies in a Dynamic Duopoly," Marketing Science, INFORMS, vol. 24(4), pages 556-568, February.
    12. V. Sambamurthy & Robert W. Zmud, 2000. "Research Commentary: The Organizing Logic for an Enterprise's IT Activities in the Digital Era—A Prognosis of Practice and a Call for Research," Information Systems Research, INFORMS, vol. 11(2), pages 105-114, June.
    13. Sorger, Gerhard, 1989. "Competitive dynamic advertising : A modification of the Case game," Journal of Economic Dynamics and Control, Elsevier, vol. 13(1), pages 55-80, January.
    14. Krishnan S. Anand & M. Faz{i}l Paç & Senthil Veeraraghavan, 2011. "Quality-Speed Conundrum: Trade-offs in Customer-Intensive Services," Management Science, INFORMS, vol. 57(1), pages 40-56, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Feng, Lipan & Jin, Minyue, 2022. "Platform vs. Manufacturer: Who should implement innovation in e-commerce supply chains?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 166(C).
    2. Cheng, Li & Wang, Yue & Zhang, Xiao & Zhu, Di, 2023. "Double-edged sword of global demand heterogeneity: How service multinationals capture the benefits and mitigate the costs of managing customer knowledge," Journal of Business Research, Elsevier, vol. 154(C).
    3. Feng, Nan & Xu, Nan & Feng, Haiyang & Li, Minqiang, 2022. "Turn on instant booking or not? Decisions of rival hosts," Annals of Tourism Research, Elsevier, vol. 96(C).
    4. Çavdar, Bahar & Erkip, Nesim, 2023. "Word-of-Mouth on Action: Analysis of Optimal Shipment Policy When Customers are Resentful," Omega, Elsevier, vol. 118(C).
    5. Siyu Shi & Chenyu Wang & T. C. Edwin Cheng & Shuai Liu, 2023. "Manufacturer encroachment with an e‐commerce division," Production and Operations Management, Production and Operations Management Society, vol. 32(6), pages 2002-2019, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Huang, Jian & Leng, Mingming & Liang, Liping, 2012. "Recent developments in dynamic advertising research," European Journal of Operational Research, Elsevier, vol. 220(3), pages 591-609.
    2. Mingwen Yang & Zhiqiang (Eric) Zheng & Vijay Mookerjee, 2021. "The Race for Online Reputation: Implications for Platforms, Firms, and Consumers," Information Systems Research, INFORMS, vol. 32(4), pages 1262-1280, December.
    3. Krishnamoorthy, Anand & Prasad, Ashutosh & Sethi, Suresh P., 2010. "Optimal pricing and advertising in a durable-good duopoly," European Journal of Operational Research, Elsevier, vol. 200(2), pages 486-497, January.
    4. Yanwu Yang & Baozhu Feng & Joni Salminen & Bernard J. Jansen, 2022. "Optimal advertising for a generalized Vidale–Wolfe response model," Electronic Commerce Research, Springer, vol. 22(4), pages 1275-1305, December.
    5. Anshuman Chutani & Suresh Sethi, 2012. "Cooperative Advertising in a Dynamic Retail Market Oligopoly," Dynamic Games and Applications, Springer, vol. 2(4), pages 347-375, December.
    6. Gary M. Erickson, 2009. "Advertising Competition in a Dynamic Oligopoly with Multiple Brands," Operations Research, INFORMS, vol. 57(5), pages 1106-1113, October.
    7. Dengpan Liu & Subodha Kumar & Vijay S. Mookerjee, 2012. "Advertising Strategies in Electronic Retailing: A Differential Games Approach," Information Systems Research, INFORMS, vol. 23(3-part-2), pages 903-917, September.
    8. Erickson, Gary M., 2009. "An oligopoly model of dynamic advertising competition," European Journal of Operational Research, Elsevier, vol. 197(1), pages 374-388, August.
    9. Dengpan Liu & Subodha Kumar & Vijay S. Mookerjee, 2020. "Flexible and Committed Advertising Contracts in Electronic Retailing," Information Systems Research, INFORMS, vol. 31(2), pages 323-339, June.
    10. Wang, Qinan & Wu, Zhang, 2001. "A duopolistic model of dynamic competitive advertising," European Journal of Operational Research, Elsevier, vol. 128(1), pages 213-226, January.
    11. S. P. Sethi & A. Prasad & X. He, 2008. "Optimal Advertising and Pricing in a New-Product Adoption Model," Journal of Optimization Theory and Applications, Springer, vol. 139(2), pages 351-360, November.
    12. Guidolin, Mariangela & Guseo, Renato, 2015. "Technological change in the U.S. music industry: Within-product, cross-product and churn effects between competing blockbusters," Technological Forecasting and Social Change, Elsevier, vol. 99(C), pages 35-46.
    13. Frank M. Bass & Anand Krishnamoorthy & Ashutosh Prasad & Suresh P. Sethi, 2005. "Generic and Brand Advertising Strategies in a Dynamic Duopoly," Marketing Science, INFORMS, vol. 24(4), pages 556-568, February.
    14. Fruchter, Gila E. & Kalish, Shlomo, 1998. "Dynamic promotional budgeting and media allocation," European Journal of Operational Research, Elsevier, vol. 111(1), pages 15-27, November.
    15. Alderighi, Marco & Bianchi, Carluccio & Lorenzini, Eleonora, 2016. "The impact of local food specialities on the decision to (re)visit a tourist destination: Market-expanding or business-stealing?," Tourism Management, Elsevier, vol. 57(C), pages 323-333.
    16. Olivier Rubel & Prasad A. Naik & Shuba Srinivasan, 2011. "Optimal Advertising When Envisioning a Product-Harm Crisis," Marketing Science, INFORMS, vol. 30(6), pages 1048-1065, November.
    17. Toker Doganoglu & Daniel Klapper, 2006. "Goodwill and dynamic advertising strategies," Quantitative Marketing and Economics (QME), Springer, vol. 4(1), pages 5-29, March.
    18. Amir, Rabah & Machowska, Dominika & Troege, Michael, 2021. "Advertising patterns in a dynamic oligopolistic growing market with decay," Journal of Economic Dynamics and Control, Elsevier, vol. 131(C).
    19. Hui Li & Qiaowei Shen & Yakov Bart, 2021. "Dynamic Resource Allocation on Multi-Category Two-Sided Platforms," Management Science, INFORMS, vol. 67(2), pages 984-1003, February.
    20. Wang, Qinan & Wu, Zhang, 2007. "An empirical study on the Lanchester model of combat for competitive advertising decisions," European Journal of Operational Research, Elsevier, vol. 183(2), pages 871-881, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:orisre:v:29:y:2018:i:1:p:70-83. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.