Electronic Markets, Search Costs, and Firm Boundaries.

Author List: Sankaranarayanan, Ramesh; Sundararajan, Arun;

Information Systems Research, 2010, Volume 21, Issue 1, Page 154-169.

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.

Keywords: agency theory; analytical modeling; economics of IS; electronic commerce; electronic markets; information systems and organizational change; interorganizational information systems; IT and new organizational forms; IT impacts on industry and market structure; IT-enabled supply chains; moral hazard; outsourcing; search costs

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List of Topics

#52	0.149	supply chain information suppliers supplier partners relationships integration use chains technology interorganizational sharing systems procurement buyer interfirm coordination enterprises flexibility
#84	0.146	electronic markets commerce market new efficiency suppliers internet changes marketplace analysis suggests b2b marketplaces industry examine easy product making physical
#151	0.124	costs cost switching reduce transaction increase benefits time economic production transactions savings reduction impact services reduced affect expected optimal associated
#154	0.122	memory support organizations information organizational requirements different complex require development provides resources organization paper transactive depth process outside difficult breadth
#70	0.081	contract contracts incentives incentive outsourcing hazard moral contracting agency contractual asymmetry incomplete set cost client parties examine effort structures double
#217	0.076	search information display engine results engines displays retrieval effectiveness relevant process ranking depth searching economics create functions incorporate low terms
#108	0.075	model research data results study using theoretical influence findings theory support implications test collected tested based empirical empirically context paper
#117	0.056	standards interorganizational ios standardization standard systems compatibility effects cooperation firms industry benefits open interoperability key heterogeneous vertical propose vendors collective
#168	0.056	firms firm financial services firm's size examine new based result level including results industry important account does suggests characterize limited