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Electronic Data Interchange: Competitive Externalities and Strategic Implementation Policies

Author

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  • 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)

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.

Suggested Citation

  • Eric T. G. Wang & Abraham Seidmann, 1995. "Electronic Data Interchange: Competitive Externalities and Strategic Implementation Policies," Management Science, INFORMS, vol. 41(3), pages 401-418, March.
    • Handle: RePEc:inm:ormnsc:v:41:y:1995:i:3:p:401-418
    DOI: 10.1287/mnsc.41.3.401
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    Citations

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    Cited by:

    1. 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.
    2. Fang Fang & Manoj Parameswaran & Xia Zhao & Andrew B. Whinston, 2014. "An economic mechanism to manage operational security risks for inter-organizational information systems," Information Systems Frontiers, Springer, vol. 16(3), pages 399-416, July.
    3. Paul Chwelos & Izak Benbasat & Albert S. Dexter, 2001. "Research Report: Empirical Test of an EDI Adoption Model," Information Systems Research, INFORMS, vol. 12(3), pages 304-321, September.
    4. 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.
    5. Andreas I. Nicolaou & D. Harrison McKnight, 2006. "Perceived Information Quality in Data Exchanges: Effects on Risk, Trust, and Intention to Use," Information Systems Research, INFORMS, vol. 17(4), pages 332-351, December.
    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. 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.
    8. Zhuo (June) Cheng & Barrie R. Nault, 2012. "Relative Industry Concentration and Customer-Driven IT Spillovers," Information Systems Research, INFORMS, vol. 23(2), pages 340-355, June.
    9. Yuan, Michael Y., 2008. "The effects of barriers to entry on monopolistic intermediary online services: The case of a digital library," Socio-Economic Planning Sciences, Elsevier, vol. 42(1), pages 56-73, March.
    10. Sulin Ba & Barrie R. Nault, 2017. "Emergent Themes in the Interface Between Economics of Information Systems and Management of Technology," Production and Operations Management, Production and Operations Management Society, vol. 26(4), pages 652-666, April.
    11. Rajiv D. Banker & Joakim Kalvenes & Raymond A. Patterson, 2006. "Research Note---Information Technology, Contract Completeness, and Buyer-Supplier Relationships," Information Systems Research, INFORMS, vol. 17(2), pages 180-193, June.
    12. Robert J. Kauffman & James McAndrews & Yu-Ming Wang, 2000. "Opening the “Black Box” of Network Externalities in Network Adoption," Information Systems Research, INFORMS, vol. 11(1), pages 61-82, March.
    13. 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.
    14. Brian Mittendorf & Jiwoong Shin & Dae-Hee Yoon, 2013. "Manufacturer marketing initiatives and retailer information sharing," Quantitative Marketing and Economics (QME), Springer, vol. 11(2), pages 263-287, June.
    15. 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.
    16. Srinivasan Raghunathan & Arthur B. Yeh, 2001. "Beyond EDI: Impact of Continuous Replenishment Program (CRP) Between a Manufacturer and Its Retailers," Information Systems Research, INFORMS, vol. 12(4), pages 406-419, December.
    17. 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.
    18. Sang Lee & Seong-bae Lim, 2007. "Factors influencing suppliers’ participation in private electronic markets," Service Business, Springer;Pan-Pacific Business Association, vol. 1(1), pages 41-62, March.
    19. Byungjoon Yoo & Vidyanand Choudhary & Tridas Mukhopadhyay, 2007. "Electronic B2B Marketplaces with Different Ownership Structures," Management Science, INFORMS, vol. 53(6), pages 952-961, June.
    20. Brian Mittendorf & Jiwoong Shin & Dae-Hee Yoon, 2013. "Manufacturer marketing initiatives and retailer information sharing," Quantitative Marketing and Economics (QME), Springer, vol. 11(2), pages 263-287, June.
    21. 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.
    22. Andreas I. Nicolaou, 2011. "Supply of data assurance in electronic exchanges and user evaluation of risk and performance outcomes," Electronic Markets, Springer;IIM University of St. Gallen, vol. 21(2), pages 113-127, June.
    23. Feng-Shang Wu & Chia-Chang Tsai, 2022. "A Framework of the Value Co-Creation Cycle in Platform Businesses: An Exploratory Case Study," Sustainability, MDPI, vol. 14(9), pages 1-18, May.

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