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.
The Internet provides an additional channel for manufacturers to provide information about and sell their products. The electronic channel has the advantage of reduced search cost and its reach is increasing, but it has limited capability to provide product information. This paper examines how Internet technology affects a monopoly manufacturer's distribution problem in an environment where product information is important for consumers to identify their ideal product. The model suggests that a manufacturer uses the electronic channel in addition to the physical channel when the product information is very valuable and product information is largely about digital attributes, or when the product information is not valuable. The model also suggests that when the manufacturer chooses to sell through both channels, there is an increase in price competition between the two channels such that the manufacturer need not sell through the electronic retailer with the highest reach. Also, when a large proportion of consumers have access to both channels, the manufacturer may sell through only one channel. The paper also examines the case where the manufacturer operates in the electronic channel and the case where the retailers are integrated.