It has been conjectured that the peer-based recommendations associated with electronic commerce lead to a redistribution of demand from popular products or "blockbusters" to less popular or "niche" products, and that electronic markets will therefore be characterized by a "long tail" of demand and revenue. We test this conjecture using the revenue distributions of books in over 200 distinct categories on Amazon.com and detailed daily snapshots of co-purchase recommendation networks in which the products of these categories are situated. We measure how much a product is influenced by its position in this hyperlinked network of recommendations using a variant of Google's PageRank measure of centrality. We then associate the average influence of the network on each category with the inequality in the distribution of its demand and revenue,quantifying this inequality using the Gini coefficient derived from the category's Lorenz curve. We establish that categories whose products are influenced more by the recommendation network have significantly flatter demand and revenue distributions, even after controlling for variation in average category demand, category size, and price differentials. Our empirical findings indicate that doubling the average network influence on a category is associated with an average increase of about 50 percent in the relative revenue for the least popular 20 percent of products, and with an average reduction of about 15 percent in the relative revenue for the most popular 20 percent of products. We also show that this effect is enhanced by higher assortative mixing and lower clustering in the network, and is greater in categories whose products are more evenly influenced by recommendations. The direction of these results persists over time, across both demand and revenue distributions, and across both daily and weekly demand aggregations. Our work illustrates how the microscopic economic data revealed by online networks can be used to define and answer new kinds of research questions, offers a fresh perspective on the influence of networked IT artifacts on business outcomes, and provides novel empirical evidence about the impact of visible recommendations on the long tail of electronic commerce.
In this paper, we analyze a model of usage pricing for digital products with discontinuous supply functions. This model characterizes a number of information technology-based products and services for which variable increases in demand are fulfilled by the addition of blocks of computing or network infrastructure. Such goods are often modeled as information goods with zero variable costs; in fact, the actual cost structure resembles a mixture of zero marginal costs and positive periodic fixed costs. This paper discusses the properties of a general solution for the optimal nonlinear pricing of such digital goods. We show that the discontinuous cost structure can be accrued as a virtual constant variable cost. This paper applies the general solution to solve two related extensions by first investigating the optimal technology capacity planning when the cost function is both discontinuous and declining over time, and then characterizing the optimal costing for the discontinuous supply when it is shared by several business profit centers. Our findings suggest that the widely adopted full cost recovery policies are typically suboptimal.
We study how interorganizational systems (IOS) such as electronic markets and other enabling information technologies that facilitate broader interfirm transactions affect the extent of outsourcing in firms. We do so by modeling firms in a three-tier value chain consisting of buyers, intermediaries, and suppliers, who can interact using IOS that lower the procurement search costs associated with finding appropriate trading partners. In the context of complex business-to-business (B2B) search, we study how decreasing search costs affect a firm's decision to insource or outsource the procurement function, depending on whether the search process is information intensive or communication intensive. Variation in search costs changes the transaction costs of interaction between firms, as well as the contracting costs associated with outsourcing, owing to changes in the costs of moral hazard for delegated search. We study these effects in a new model that integrates search theory into the principal-agent framework, and establish that the optimal outsourcing contract has a simple "all or nothing" performance-based structure under fairly general assumptions. Our model predicts that when B2B search is information intensive, IOS will facilitate an increase in outsourcing, market-based transactions, and a reduction in the vertical scope of extended enterprises. In contrast, when B2B search is primarily communication intensive, IOS will lead to tighter integration and an increase in the vertical scope of the extended enterprise. Our research suggests that the nature of the information technologies and of the business activities supported by IOS are crucial determinants of the organizational and industry changes they induce, and our results have important implications for a variety of industries in which both technological and agency issues will influence the eventual success of global IT-facilitated extended enterprise initiatives.
How are business schools thinking about developing leaders for the emerging digital economy? Is there a set of core principles we can apply to thinking about the enabling potential of information technologies and their consequences for business and society? We present a business-centric framework and a technology-centric framework that together form a blueprint for answering these questions. The business-centric framework articulates three compelling reasons why information technology (IT) matters in business: (1) IT continually transform industry and society, (2) executive decisions about IT investments, governance, and strategy are critical to organizational success, and (3) deriving value from increasingly available data trails defines effective decision making in the digital economy. However, our conversations with the leadership of 45 business schools and our subsequent data indicate that business schools are challenged by effectively training future executives to think about these reasons and act on them as part of a forward-looking program of business education that is grounded in stable concepts. In response, the technology-centric framework provides a set of grounding concepts and stable principles about IT that have emerged over the last four decades, and leads to a natural set of consequences that can inform thinking about IT in business. We illustrate how these complementary frameworks--business and technology--can be combined to frame an educational program by outlining a set of key questions, by placing these questions in the context suggested by our frameworks, and by providing guidelines toward answering them. These questions also define a natural path for future research about IT in business and society that will lead to stronger intellectual foundations for the field and define future education that is better grounded in concepts and theories that emerge from academic research.
This paper analyzes the optimal choice of pricing schedules and technological deterrence levels in a market with digital piracy where sellers can influence the degree of piracy by implementing digital rights management (DRM) systems. It is shown that a monopolist's optimal pricing schedule can be characterized as a simple combination of the zero-piracy pricing schedule and a piracy-indifferent pricing schedule that makes all customers indifferent between legal usage and piracy. An increase in the quality of pirated goods, while lowering prices and profits, increases total surplus by expanding both the fraction of legal users and the volume of legal usage. In the absence of price discrimination, a seller's optimal level of technology-based protection against piracy is shown to be at the technologically maximal level, which maximizes the difference between the quality of the legal and pirated goods. However, when a seller can price discriminate, its optimal choice is always a strictly lower level of technology-based protection. These results are based on the following digital rights conjecture: that granting digital rights increases the incidence of digital piracy, and that managing digital rights therefore involves restricting the rights of usage that contribute to customer value. Moreover, if a digital rights management system weakens over time due to the underlying technology being progressively hacked, a seller's optimal strategic response may involve either increasing or decreasing its level of technology-based protection. This direction of change is related to whether the DRM technology implementing each marginal reduction in piracy is increasingly less or more vulnerable to hacking. Pricing and technology choice guidelines are presented, and some welfare implications are discussed.
We analyze the competitive and economic implications of information technology, the allocation of decision nights, and task bundling during business process reengineering. The popular reengineering literature advocates employee empowerment-decentralizing decision authority and consolidating tasks as complementary strategies. Our analysis reveals, however, that implementing these two changes simultaneously is suboptimal in many cases. Decentralization and consolidation decisions can occur separately or together; the optimal combination depends on the effectiveness of technology aimed at skill enhancement and the customers' sensitivity to time and quality. We identify those process parameters that can cause decentralization and consolidation to have opposite effects on process performance; we also point to other parameters, such as customer-to-customer variability, which can cause them to complement one another. Finally, we explain why, in a time-based competitive marketplace, firms are more likely to centralize their decision-making process while concentrating their information technology investments on enhancing productivity and intraorganizational communications.