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The Growth of Interorganizational Systems in the Presence of Network Externalities

Author

Listed:
  • Frederick J. Riggins

    (Faculty of Business, University of Alberta, Edmonton, Alberta, Canada T6G 2R6)

  • Charles H. Kriebel

    (Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Tridas Mukhopadhyay

    (Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

We develop a model of network growth in the presence of network externalities for the case where a buyer initiates an interorganizational system with its suppliers. In our two-stage model, suppliers joining the network in the first stage can gain economic benefit from increased market share or higher price for the primary product. Suppliers encounter negative externalities since the economic benefit accruing to participating suppliers is less for increasingly larger networks. In the first stage, the buyer may experience initial supplier adoption of the network followed by a "stalling" problem due to negative externalities. In order to overcome this stalling problem, the buyer may find it optimal to subsidize some suppliers' costs to join the network in the second stage. We characterize the buyer's optimal second stage subsidy policy and show the conditions under which the buyer will find it optimal to offer a subsidy. If the suppliers have some positive ex ante expectation of a second stage subsidy, the growth of the network will be retarded in the first stage resulting in suboptimal profits for the buyer.

Suggested Citation

  • Frederick J. Riggins & Charles H. Kriebel & Tridas Mukhopadhyay, 1994. "The Growth of Interorganizational Systems in the Presence of Network Externalities," Management Science, INFORMS, vol. 40(8), pages 984-998, August.
  • Handle: RePEc:inm:ormnsc:v:40:y:1994:i:8:p:984-998
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    File URL: http://dx.doi.org/10.1287/mnsc.40.8.984
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    1. repec:eee:jeborg:v:143:y:2017:i:c:p:133-146 is not listed on IDEAS
    2. Oral, Muhittin & Kettani, Ossama & Cinar, Unver, 2001. "Project evaluation and selection in a network of collaboration: A consensual disaggregation multi-criterion approach," European Journal of Operational Research, Elsevier, vol. 130(2), pages 332-346, April.
    3. Kevin Zhu, 2004. "Information Transparency of Business-to-Business Electronic Markets: A Game-Theoretic Analysis," Management Science, INFORMS, vol. 50(5), pages 670-685, May.
    4. Fritz, Melanie & Hausen, Tobias, 2009. "Electronic supply network coordination in agrifood networks: Barriers, potentials, and path dependencies," International Journal of Production Economics, Elsevier, vol. 121(2), pages 441-453, October.
    5. Roy Radner & Ami Radunskaya & Arun Sundararajan, 2010. "Dynamic Pricing of Network Goods with Boundedly Rational Consumers," Working Papers 10-13, New York University, Leonard N. Stern School of Business, Department of Economics.
    6. 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.
    7. Amalia R. Miller & Catherine Tucker, 2009. "Privacy Protection and Technology Diffusion: The Case of Electronic Medical Records," Management Science, INFORMS, vol. 55(7), pages 1077-1093, July.
    8. Rajiv D. Banker & Robert J. Kauffman, 2004. "50th Anniversary Article: The Evolution of Research on Information Systems: A Fiftieth-Year Survey of the Literature in Management Science," Management Science, INFORMS, vol. 50(3), pages 281-298, March.
    9. Tridas Mukhopadhyay & Sunder Kekre, 2002. "Strategic and Operational Benefits of Electronic Integration in B2B Procurement Processes," Management Science, INFORMS, vol. 48(10), pages 1301-1313, October.
    10. Aron, Ravi & Ungar, Lyle & Valluri, Annapurna, 2008. "A model of market power and efficiency in private electronic exchanges," European Journal of Operational Research, Elsevier, vol. 187(3), pages 922-942, June.
    11. Prosser, Alexander & Nickl, Alexander, 1997. "The impact of EDI on interorganizational integration," International Journal of Production Economics, Elsevier, vol. 52(3), pages 269-281, October.

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