This paper considers on-demand services and its impact on market structure, firm profitability, and consumer welfare. The unique properties of on-demand services are the conversion of fixed costs to variable costs, removal of capacity constraint, and fast setup time (which enables quick entry by any firm at any time when there is opportunity), whereas privacy and security concerns and switching costs have been noted as the biggest barriers from adopting on-demand services. With a stylized model capturing these benefits and barriers to using on-demand services, we establish several results. First, we show that conversion of fixed cost to variable cost enables new and small firms to enter existing markets and leads to the creation of new markets. Second, we show that competition and the threat of new entrants can be an important driver of a firm's decision to switch to on-demand services. In addition, a firm's barriers to using on-demand services can influence another firm's entry decision. Third, we show that two identical firms may employ different technologies in equilibrium. Fourth, we show that fast setup time and removal of capacity constraint associated with on-demand services make it impossible for firms to make supranormal return and would lead to a perfect competitive market, even when there is only one firm, under very general conditions. Such a result still holds even when there exists an economy of scale (e.g., quantity discount) from using on-demand services. On the other hand, when there are barriers preventing firms from offering similar products and products are substantially differentiated, on-demand services can amplify this advantage of entry barriers by enabling firms to further increase prices and enhance their profitability. Therefore, contrary to the common belief that offering on-demand services is best for firms offering commodity products, we show on-demand services to be more profitable for firms with differentiated products.
The article presents research on risk management related to computer network security in management information systems. A queuing model is presented to quantify the downtown loss faced by a network in a security attack and compare it to the costs of investment in computer security technologies, diversification of computer software to limit the risk of coordinated failure and investment in information technology to repair failures. Situations under which the strategy of diversification of computer software are financially advantageous are discussed.
This paper examines the potential social costs of standardization, including possible vendor reactions to standards and their impacts on the adoption of new technology and long-term market structure. Specifically, we study how vendors might react to standards in the market for routers and switches, two of the most important pieces of networking hardware for the information systems infrastructure of modern firms. Using data from over 22,000 establishments surveyed by Harte Hanks Market Intelligence, we provide evidence that vendors are able to maintain high switching costs in the market for routers and switches despite the presence of open standards in the industry. Several vendor actions are discussed in this paper, including manipulating horizontal compatibility between comparable rival products and vertical compatibility between complementary products, maintaining a broader product line, creating product suites, and targeting specific market segments. Our results further suggest that the presence of switching costs can lead to inefficient adoption of new information technology and that vendors may be able to influence the speed of new information technology adoption.
The ability to retain and lock in customers in the face of competition is a major concern for online businesses, especially those that invest heavily in advertising and customer acquisition. In this paper, we develop and implement an approach for measuring the magnitudes of switching costs and brand loyalty for online service providers based on the random utility modeling framework. We then examine how systems usage, service design, and other firm-and individual-level factors affect switching and retention. Using data on the online brokerage industry, we find significant variation (as much as a factor of two) in measured switching costs. We find that customer demographic characteristics have little effect on switching, but that systems usage measures and systems quality are associated with reduced switching. We also find that firm characteristics such as product line breadth and quality reduce switching and may also reduce customer attrition. Overall, we conclude that online brokerage firms appear to have different abilities in retaining customers and have considerable control over their switching costs.