An Economic Model of Product Quality and IT Value

Abstract

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).

Creating Business Value through Agile Project Management and Information Systems Development: The Perceived Impact of Scrum

“…Customer and user satisfaction [7,8,20] as well as consumer welfare [18,19] are significant performance measures for IS business value; in our context we identified employee satisfaction of the different team members in the development teams that perform a development task, as an important concept. These team members have the roles of project managers, analysts, developers, and testers.…”

“…Quality is another important concept in the IS business value literature, in the form of product quality [18,19] or system and information quality [7,8]. In the agile development literature a strong focus is on measures that can be applied during the development process.…”

The optimal level of CRM IT investments

“…Brynjolfsson and Hitt 1996;Cheng and Nault 2006) analyze the impact of IT investments on the profitability of firms. Thatcher and Pingry (2004) also study the impact of firms' IT investments on economic performance but propose an economic model to formalize this relationship. However, these approaches do not differentiate among different IT projects but consider only the total IT spending of a firm and the impact on the economic performance.…”

Preserving Knowledge on IS Business Value

“…Researchers have analyzed a variety of economic measures, such as productivity Hitt 1996, 2000), production efficiency (Thatcher and Oliver 2001), consumer welfare (Thatcher and Pingry 2004), profit ratios (Weill 1992;Barua et al 1995), and also marketoriented measures (Bharadwaj et al 1999;Brynjolfsson and Yang 1999). The abundance of different aspects of IS success is addressed by researchers who provide taxonomies to organize the diverse research (DeLone and McLean 1992;Irani and Love 2002;Gable et al 2008).…”