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Endogenous Firm and Information Rent Under Demand Uncertainty

Author

Listed:
  • Li, Yanfei
  • Yao, Shuntian
  • Chia, Wai-Mun

Abstract

Increasing evidence shows that ICT investment improves firm performance. Among the many explanations on why ICT contributed to labor productivity surge since 1990, this is the most promising one. It is thus necessary to take the firm as an information processing organization, putting it in stochastic environment. As perfect information is no longer the assumption, that firms exogenously exist in the economy would no longer be assumed here. With these in mind, the paper provides a model that involves the division of labor and specialization, the production and consumption under demand uncertainty, and the value of information. It shows that under certain business conditions, a firm with certain type of information processing ability comes into being endogenously. A surplus, which could reasonably be argued as information rent, is generated with firm production. The size of this information rent depends on a few key parameters, including the level of uncertainty, the degree of market competition, and the cost of information processing. To test the model, case studies on the financial industry and the wholesale and retail industry are conducted, which corroborate the theoretical predictions of the model.

Suggested Citation

  • Li, Yanfei & Yao, Shuntian & Chia, Wai-Mun, 2009. "Endogenous Firm and Information Rent Under Demand Uncertainty," MPRA Paper 13506, University Library of Munich, Germany, revised 16 Feb 2009.
    • Handle: RePEc:pra:mprapa:13506
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    demand uncertainty; information processing; firm; information rent;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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