No abstract

No abstract

is an Assistant Professor of Management Information Systems at the Eller College of Management at the University of Arizona, where he has been a member of the faculty since 1997. He holds a B.S. in economics and an M.A. and Ph.D. in information technology from the Wharton School of the University of Pennsylvania.His research examines the economic effects of IT, including the business value of IT investments, the impact of patent policies on technology innovation, product design, and consumer welfare, and the strategic uses of information in the services industry. DAVID E. PINGRY is a Professor of Management Information Systems and Economics at the Eller College of Management at the University of Arizona. Previously, Professor Pingry was on the faculty at Virginia Tech; he has held visiting faculty positions at Purdue University and Texas A&M; and he held the Treibick Visiting Endowed Chair in the Connecticut Information Technology Institute at the University of Connecticut. His current interests are decision support systems, patent policy, and IT productivity.ABSTRACT: This paper develops a series of two-stage duopoly models of qualityprice competition and a series of monopoly models of quality-price choice in order to examine the impact of information technology (IT) investments on firm profit, firm productivity, and consumer welfare. We solve the duopoly and monopoly models for four cost functions, where each function makes a different assumption about the form of the marginal cost of production. These models are used to conduct a twoby-four comparison [(monopoly, duopoly) × (four cost functions)] of the impact of IT investments on economic performance. The analysis reveals that together market structure and cost structure play a critical role in determining the form of the relationship between IT investment and economic measures. Specifically, moving from monopoly to duopoly and moving from zero marginal cost to marginal cost as a function of quality increase the number of economic measures for which the directional effects of IT investment are ambiguous, or depend on model parameter values. KEY WORDS AND PHRASES: business value, consumer welfare, economic analysis, information technology investments, information technology value, productivity. FOR ALMOST TWO DECADES, EMPIRICAL STUDIES in the information technology (IT) value literature have examined the impact of IT on many measures of economic Downloaded by [University of Lethbridge] at 00:14 04 October 2015 62 THATCHER AND PINGRYperformance, including firm productivity ([6, 7, 14], see [10] for a recent review), firm profitability ([4, 12, 14], see [10] for a recent review), consumer surplus [5,8,14], and intermediate performance measures such as product quality and output levels [1,11,17,19]. Given the diversity of empirical results and the complexity of the relationships, recent work has explored IT value from a theoretical perspective [18, 22, 23, 24]. This paper extends this theoretical work by developing a series of twostage duopoly models of quality-...

W e use an economic model to formalize the complex relationships among IT investments, intermediate performance measures (e.g., product quality and output levels), and economic performance (e.g., productivity, profits, and consumer surplus). We demonstrate that a profit-maximizing monopolist invests in IT (modeled as changes in parametric characteristics of the firm) to design a better-quality product and charge a higher price. While this profit-maximizing adjustment generates more consumer surplus, it also increases production costs in a way that adversely affects productivity. In contrast, a simple model extension shows that when a firm is unwilling or unable to improve product quality, then IT investments result in suboptimal improvements in profits, an increase in consumer surplus, and an increase in productivity. Together, these models highlight the way in which product quality moderates the relationship between IT investments and economic performance. We also demonstrate that these relationships are robust to the socially optimal case in which a social planner chooses price and quality to maximize social welfare. In addition, we demonstrate that the results of the monopoly model hold when considering the design and development of products offered free of charge (e.g., free online content), but that provide indirect benefits to the firm (e.g., more advertising revenues).

Introduction Global spending on Information Technology (IT) continues to grow and is expected to reach $1.66 trillion in 2009. In addition, IT represents a large (40--45%) and stable share (in nominal dollars) of firm spending on equipment and software. As CIOs and IT managers attempt to budget these large IT expenditures they must help the business align IT spending with business strategy and prioritize IT investments in conjunction with business goals. When prioritizing IT spending managers often compare their own IT spending priorities with those of other firms. That is, "Every year, CIOs and their finance people get prepared for the following question from their CEOs: "How does our IT spending compare with our competitors?" In an effort to help firms benchmark their IT spending priorities, we surveyed 1,495 business leaders in Alabama, Arizona, Colorado, and Texas during the 4 th Quarter of 2005 to examine the firms' IT spending priorities across business functions (such as, administration; production and distribution; customer relationship management; research and design; managerial decision-making; and security) and the impact of firm and industry characteristics on these priorities. While previous studies examine IT spending from different perspectives, we are not aware of any work that examines the factors that determine how firms allocate IT expenditures across business functions. Empirical analysis of this survey data shows that the highest IT spending priorities of the respondents are in the areas of administration and production and distribution while the lowest priorities are in the areas of research and development (R&D) and security. In addition, the analysis shows that factors such as industry type, firm size, and perceptions of the impact of past IT investments on product quality and revenue may differentially affect the allocation of IT expenditures across business function categories. For example, the results show that: • Service firms are more likely to rank IT spending in support of R&D and security as their highest priority. • Small firms are more likely to rank IT spending in support of security as their lowest priority. • Firms that have leveraged past IT expenditures to increase product/service quality are more likely to rank customer relationship management (CRM) as their highest IT priority. • Firms that have leveraged past IT expenditures to increase revenues are more likely to rank managerial decision-making as their highest IT priority.