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An Economic Analysis of the Introduction of an Electronic Data Interchange System

Author

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  • Anitesh Barua

    (Department of Management Science and Information Systems, Graduate School of Business, The University of Texas at Austin, Austin, Texas 78712)

  • Byungtae Lee

    (Department of Management Information Systems, Karl Eller Graduate School of Management, The University of Arizona, Tucson, Arizona 85721)

Abstract

Although electronic data interchange (EDI) holds the promise of significantly increasing the efficiency of business transactions, an installed base of proprietary implementations has been detrimental to the widespread acceptance of the technology. Thus, an important research issue involves strategies for facilitating EDI adoption. We analyze the introduction of an EDI system in a vertical market involving one manufacturer and two suppliers. The manufacturer initiates an EDI network, and penalizes a supplier for not joining the system by reducing its volume of business with the supplier. Along with a “stick,” the manufacturer can also use a “carrot” in the form of a subsidy to partially offset a supplier's setup cost.The competition between the suppliers is characterized by incentive types for joining the EDI system (“motivating” or “threatening”) and the Information Technology (IT) efficiency (“efficient” or “inefficient”). We show that regardless of its cost structure, a supplier may have to join the EDI network out of “strategic necessity,” due to the presence of an IT-efficient supplier. Our analysis further shows that depending on the supplier competition structure, the EDI system may prove to be a “beneficial” strategic necessity for a large supplier and an “unfortunate” strategic necessity for a small supplier. Another key result is that by increasing the severity of the penalty, both the manufacturer and the follower supplier can be worse off under certain conditions. The analysis of subsidy strategies reveals that unless leadership and followership positions are reversed due to a subsidy, subsidizing a supplier has no impact on the joining time of its competitor. Thus the EDI initiator cannot induce both suppliers to join earlier by subsidizing one supplier. Also, the larger the slack capacity of the leader, the higher (lower) the manufacturer's incentive to subsidize the leader (follower). These results offer insights for initiators and adopters regarding penalty and subsidy strategies, impact on competition structure, joining decisions and network growth.

Suggested Citation

  • Anitesh Barua & Byungtae Lee, 1997. "An Economic Analysis of the Introduction of an Electronic Data Interchange System," Information Systems Research, INFORMS, vol. 8(4), pages 398-422, December.
  • Handle: RePEc:inm:orisre:v:8:y:1997:i:4:p:398-422
    DOI: 10.1287/isre.8.4.398
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    Citations

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    Cited by:

    1. Rajiv Kohli & Sarv Devaraj, 2003. "Measuring Information Technology Payoff: A Meta-Analysis of Structural Variables in Firm-Level Empirical Research," Information Systems Research, INFORMS, vol. 14(2), pages 127-145, June.
    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. Hui-Ling Huang, 2014. "Performance effects of aligning service innovation and the strategic use of information technology," Service Business, Springer;Pan-Pacific Business Association, vol. 8(2), pages 171-195, June.
    4. Ali Tafti & Sunil Mithas & M. S. Krishnan, 2013. "The Effect of Information Technology-Enabled Flexibility on Formation and Market Value of Alliances," Management Science, INFORMS, vol. 59(1), pages 207-225, June.
    5. Arndt, Channing & Schiller, Rico & Tarp, Finn, 2001. "Grain transport and rural credit in Mozambique: solving the space-time problem," Agricultural Economics, Blackwell, vol. 25(1), pages 59-70, June.
    6. Stefan Schweikl & Robert Obermaier, 2020. "Lessons from three decades of IT productivity research: towards a better understanding of IT-induced productivity effects," Management Review Quarterly, Springer, vol. 70(4), pages 461-507, November.
    7. 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.
    8. Subhajyoti Bandyopadhyay & John M. Barron & Alok R. Chaturvedi, 2005. "Competition Among Sellers in Online Exchanges," Information Systems Research, INFORMS, vol. 16(1), pages 47-60, March.
    9. Jonathan W. Palmer & M. Lynne Markus, 2000. "The Performance Impacts of Quick Response and Strategic Alignment in Specialty Retailing," Information Systems Research, INFORMS, vol. 11(3), pages 241-259, September.
    10. 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.
    11. 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.
    12. Radhakrishnan, Abirami & Davis, John Stephen & Sridharan, Sri V. & Moore, De Wayne & David, Dessa, 2018. "The impact of inter-organizational information systems-enabled external integration on capabilities of buyer–supplier dyads," European Management Journal, Elsevier, vol. 36(4), pages 558-572.
    13. Kim, Daekwan & Shin, Geon-Cheol & Jean, Ruey-Jer “Bryan” & Tamer Cavusgil, S. & Chen, Charles, 2023. "Degree of involvement in supply chain system development and relational performance: A potential dark side in supply chain relationships," Journal of Business Research, Elsevier, vol. 154(C).
    14. 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.
    15. Hilal Atasoy & Emre M. Demirezen & Pei‐Yu Chen, 2021. "Impacts of Patient Characteristics and Care Fragmentation on the Value of HIEs," Production and Operations Management, Production and Operations Management Society, vol. 30(2), pages 563-583, February.
    16. Urbaczewski, Andrew & Jessup, Leonard M. & Wheeler, Bradley C., 1998. "A manager's primer in electronic commerce," Business Horizons, Elsevier, vol. 41(5), pages 5-16.
    17. Byungjoon Yoo & Vidyanand Choudhary & Tridas Mukhopadhyay, 2007. "Electronic B2B Marketplaces with Different Ownership Structures," Management Science, INFORMS, vol. 53(6), pages 952-961, June.
    18. 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.

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