Millions of people participate in online social media to exchange and share information. Presumably, such information exchange could improve decision making and provide instrumental benefits to the participants. However, to benefit from the information access provided by online social media, the participant will have to overcome the allure of <i>homophily</i>—which refers to the propensity to seek interactions with others of similar status (e.g., religion, education, income, occupation) or values (e.g., attitudes, beliefs, and aspirations). This research assesses the extent to which social media participants exhibit homophily (versus heterophily) in a unique context—virtual investment communities (VICs). We study the propensity of investors in seeking interactions with others with similar sentiments in VICs and identify theoretically important and meaningful conditions under which homophily is attenuated. To address this question, we used a discrete choice model to analyze 682,781 messages on Yahoo! Finance message boards for 29 Dow Jones stocks and assess how investors select a particular thread to respond. Our results revealed that, despite the benefits from heterophily, investors are not immune to the allure of homophily in interactions in VICs. The tendency to exhibit homophily is attenuated by an investor’s experience in VICs, the amount of information in the thread, but amplified by stock volatility. The paper discusses important implications for practice.
Virtual communities continue to play a greater role in social, political, and economic interactions. However, how users value information from these communities and how that affects their behavior and future expectations is not fully understood. Stock message boards provide an excellent setting to analyze these issues given the large user base and market uncertainty. Using data from 502 investor responses from a field experiment on one of the largest message board operators in South Korea, our analyses revealed that investors exhibit confirmation bias, whereby they preferentially treat messages that support their prior beliefs. This behavior is more pronounced for investors with higher perceived knowledge about the market and higher strength of belief (i.e., sentiment) toward a particular stock. We also find a negative interaction effect between the perceived knowledge and the strength of prior belief on confirmation bias. Those exhibiting confirmation bias are also more overconfident; as a result, they trade more actively and expect higher market returns than is warranted. Collectively, these results suggest that participation in virtual communities may not necessarily lead to superior financial returns.
Online word-of-mouth (WOM) such as consumer opinions, user experiences, and product reviews has become a major information source in consumer purchase decisions. Prior research on online WOM effect has focused mostly on low-involvement products such as books or CDs. For these products, retailer-hosted (internal) WOM is shown to influence sales overwhelmingly. Numerous surveys, however, suggest consumers often conduct pre-purchase searches for high-involvement products (e.g., digital cameras) and visit external WOM websites during the search process. In this study, we analyze the relative impact of external and internal WOMs on retailer sales for high-involvement products using a panel of sales and WOM data for 148 digital cameras from Amazon.com and three external WOM websites (Cnet, DpReview, and Epinions) over a four-month period. The results suggest that a retailer's internal WOM has a limited influence on its sales of high-involvement products, while external WOM sources have a significant impact on the retailer's sales. The findings imply that external WOM sources play an important role in the information search process.
The information systems (IS) literature suggests that by lowering coordination costs, information technology (IT) will lead to an overall shift towards more use of markets. Empirical work in this area provides evidence that IT is associated with a decrease in vertical integration (VI). Economy-wide data, however, suggests that over the last 25 years the average level of VI has, in fact, increased. This paper studies this empirical anomaly by explicating the moderating impact of two measures of competitive environment, demand uncertainty, and industry concentration, on the relationship between IT and VI. We examine firms included in 1995 to 1997 InformationWeek 500 and the COMPUSTAT database. Consistent with the IS literature, the analysis suggests that IT is associated with a decrease in VI when demand uncertainty is high or industry concentration is low. However, contrary to the IS literature, IT is found to be associated with an increase in VI when industry concentration is high or demand uncertainty is low. Furthermore, as demand uncertainty increases, less vertically integrated firms invest more in IT, while as industry concentration increases, more vertically integrated firms invest more in IT. The analysis also suggests that firms' choice of the level of VI and IT investment, under different levels of demand uncertainty and industry concentration, are rational. When demand uncertainty is high or industry concentration is low, increase in VI may increase coordination and production costs. Thus, less VI is rational. However, when industry concentration is high or demand uncertainty is low, increase in VI may decrease coordination and production costs. Thus, firms choose more VI in such industries. The implications for research and practice are discussed.
Virtual communities are a significant source of information for consumers and businesses. This research examines how users value virtual communities and how virtual communities differ in their value propositions. In particular, this research examines the nature of trade-offs between information quantity and quality, and explores the sources of positive and negative externalities in virtual communities. The analyses are based on more than 500,000 postings collected from three large virtual investing-related communities (VICs) for 14 different stocks over a period of four years. The findings suggest that the VICs engage in differentiated competition as they face trade-offs between information quantity and quality. This differentiation among VICs, in turn, attracts users with different characteristics. We find both positive and negative externalities at work in virtual communities. We propose and validate that the key factor that determines the direction of network externalities is posting quality. The contributions of the study include the extension of our understanding of the virtual community evaluation by users, the exposition of competition between virtual communities, the role of network externalities in virtual communities, and the development of an algorithmic methodology to evaluate the quality (noise or signal) of textual data. The insights from the study provide useful guidance for design and management of VICs.
This paper examines the antecedents and consequences of Internet use in the procurement process. Drawing upon the resource-based view (RBV) of the firm and the technology, organization, and environment framework, we develop an integrative model that examines the antecedents and consequences of Internet use in two stages--the search stage and the order initiation and completion (OIC) stage--of the procurement process. The model enables us to deconstruct both the usage and the performance aspects of information technology (IT) in business processes, and to provide insights into the enablers of use and business value. The model is estimated with survey data from 412 firms. Our results suggest that while some resources, such as procurement-process digitization, influence Internet use in both the procurement stages, other resources, such as the diversity of organizational procurement knowledge, impact Internet use in only one stage. We also find that Internet use in the OIC stage has a more significant impact on procurement-process performance than use in search. This study extends the digital capabilities and firm performance literature in the context of electronic procurement. This study also contributes to the small but emerging stream of literature that investigates antecedents, the extent, and implications of IT use holistically.
There is unprecedented interest in digitally enabled extended enterprises that enable firms to gain access to specialized skills and capabilities globally Given this motivation, firms are unbundling their value chain processes and exploring new sourcing mechanisms. With the emergence of world-class skills and capabilities in offshore locations, new sourcing mechanisms have become available beyond traditional domestic insourcing and outsourcing. However, there is little systematic research examining how firms choose sourcing mechanisms for their business processes. This study views the digitally enabled extended enterprise as a complex system of business processes and examines how sourcing choices are made in such enterprises. It builds on the modular systems theory to posit that modularization of business processes and their underlying information technology (IT) support infrastructures are associated with the choice of sourcing mechanisms for the processes. The study tests this proposition in a sample of business process sourcing choices made by 93 medium and large U.S. firms. The results show that firms tend to choose domestic outsourcing for processes that are high in modularity and offshore outsourcing for processes that are low in modularity Further, when processes can be detached from a firm's IT infrastructure, firms tend to use offshore outsourcing. However, when processes are tightly coupled with underlying IT infrastructure, it may be infeasible to detach processes and execute them in remote locations. Implications for theory and practice are also discussed.
Many traditional organizations have undertaken major initiatives to leverage the Internet to transform how they coordinate value activities with customers, suppliers, and other business partners with the objective of improving firm performance. This paper addresses processes through which business value is created through such Internet-enabled value chain activities. Relying on the resource-based view of the firm, we propose a model positing that a firm's abilities to coordinate and exploit firm resources (processes, information technology, and readiness of customers and suppliers) create online informational capabilities (a higher order resource) which then leads to improved operational and financial performance. The outcome of a firm's online informational capabilities is reflected in superior operational performance through customer and supplier-side digitization efforts, which reflect the extent to which transactions and external interactions occur electronically. We also hypothesize that increased customer and supplier-side digitization leads to better financial performance. The model is tested with data from over 1,000 firms in the manufacturing, retail, and wholesale sectors. The analysis suggests that while most firms are lagging in their supplier-side initiatives relative to the customer-side, supplier-side digitization has a strong positive impact on customer-side digitization, which, in turn, leads to better financial performance. Further, both customer and supplier readiness to engage in digital interactions are shown to be as important as a firm's internal digitization initiatives, implying that a firm's transformation-related decisions should include its customers' and suppliers' resources and incentives.
We propose priority pricing as an on-line adaptive resource scheduling mechanism to manage real-time databases within organizations. These databases provide timely information for delay sensitive users. The proposed approach allows diverse users to optimize their own objectives while collectively maximizing organizational benefits. We rely on economic principles to derive priority prices by modeling the fixed-capacity real-time database environment as an economic system. Each priority is associated with a price and a delay, and the price is the premium (congestion toll resulting from negative externalities) for accessing the database. At optimality, the prices are equal to the aggregate delay cost imposed on all other users of the database. These priority prices are used to control admission and to schedule user jobs in the database system. The database monitors the arrival processes and the state of the system, and incrementally adjusts the prices to regulate the flow. Because our model ignores the operational intricacies of the real-time databases (e.g., intermediate queues at the CPU and disks, memory size, etc.) to maintain analytical tractability, we evaluate the performance of our pricing approach through simulation. We evaluate the database performance using both the traditional real-time database performance metrics (e.g., the number of jobs serviced on time, average tardiness) and the economic benefits (e.g., benefits to the organization). The simulation results, under various database workload parameters, show that our priority pricing mechanism not only maximizes organizational benefits but also outperforms in all aspects of traditional performance measures compared to frequently used database scheduling techniques, such as first-come-first-served, earliest deadline first and least slack first.