IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Electronic Data Interchange: Competitive Externalities and Strategic Implementation Policies

Listed author(s):
  • 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)

Registered author(s):

    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.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Article provided by INFORMS in its journal Management Science.

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

    in new window

    Handle: RePEc:inm:ormnsc:v:41:y:1995:i:3:p:401-418
    Contact details of provider: Postal:
    7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA

    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:41:y:1995:i:3:p:401-418. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.