We employ the theory of incomplete contracts to examine the relationship between ownership and investment in electronic networks such as the Internet and interorganizational information systems. Electronic networks represent an institutional structure that has resulted from the introduction of information technology in industrial and consumer markets. Ownership of electronic networks is important because it affects the level of network-specific investments, which in turn determine the profitability, and in some cases the viability, of these networks. In our analysis we define an electronic network as a set of participants and a portfolio of assets. The salient concept in this perspective is the degree to which network participants are indispensable in making network assets productive. We derive three main results. First, if one or more assets are essential to all network participants, then all the assets should be owned together. Second, participants that are indispensable to an asset essential to all participants should own all network assets. Third and most important, in the absence of an indispensable participant, and as long as the cooperation of at least two participants is necessary to create value, sole ownership is never the best form of ownership for an electronic network. This latter result implies that as the leading network participants become more dispensable, we should see an evolution toward forms of joint ownership.
Buyers are transforming their relationships with suppliers. For example, instead of playing off dozens or even hundreds of competing suppliers against one another, many firms are finding it more profitable to work closely with only a small number of "partners." In this paper we explore some causes and consequences of this transformation. We apply the economic theory of incomplete contracts to determine the optimal strategy for a buyer. We find that the buyer firm will often maximize profits by limiting its options and reducing its own bargaining power. This may seem paradoxical in an age of cheap communications costs and aggressive competition. However, unlike earlier models that focused on coordination costs, we focus on the critical importance of providing incentives for suppliers. Our results spring from the need to make it worthwhile for suppliers to invest in "noncontractibles" such as innovation, responsiveness, and information sharing. Such incentives will often be stronger when the number of competing suppliers is small. The findings of the theoretical models appear to be consistent with observations from empirical research which highlight the key role of information technology in enabling this transformation.
Interorganizational information systems—i.e., systems spanning more than a single organization—are proliferating as companies become aware of the potential of these systems to affect interorganizational interactions in terms of economic efficiency and strategic conduct. This new technology can have a far-reaching impact on the structure of entire industries. This article identifies two types of interorganizational information systems: information links and electronic markets. It then explores how economic models can be employed to study the implications of information links for the coordination of individual organizations with their customers and their suppliers, and the implications of electronic market systems for efficiency and competition in vertical markets. Finally, the strategic significance of interorganizational systems is addressed, and certain potential long-term impacts on the structure of markets, industries, and organizations are discussed.
Information systems can serve as intermediaries between the buyers and the sellers in a vertical market, thus creating an "electronic marketplace." A major impact of these electronic market systems is that they typically reduce the search costs buyers must pay to obtain information about the prices and product offerings available in the market. Economic theory suggests that this reduction in search costs plays a major role in determining the implications of these systems for market efficiency and competitive behavior. This article draws on economic models of search and examines how prices, seller profits, and buyer welfare are affected by reducing search costs in commodity and differentiated markets. This reduction results in direct efficiency gains from reduced intermediation costs and in indirect but possibly larger gains in allocation efficiency from better-informed buyers. Because electronic market systems generally reduce buyers' search costs, they ultimately increase the efficiency of interorganizational transactions, in the process affecting the market power of buyers and sellers. The economic characteristics of electronic marketplaces, in addition to their ability to reduce search costs, create numerous possibilities for the strategic use of these systems.
The use of information technology (IT) as a competitive weapon has become a popular cliche; but there is still a marked lack of understanding of the issues that determine the influence of information technology on a particular organization and the processes that will allow a smooth coordination of technology and corporate strategy. This article surveys the major efforts to arrive at a relevant framework, and attempts to integrate them in a more comprehensive viewpoint. The focus then turns to the major research issues in understanding the impact of information technology on competitive strategy.