Strategic IT Investments: The Impact of Switching Cost and Declining IT Cost

Demirhan, Didem; Jacob, Varghese S.; Raghunathan, Srinivasan

doi:10.1287/mnsc.1060.0629

Cited by 48 publications

(25 citation statements)

References 34 publications

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“…This kind of cost reduction, combined with the increase in the number of available functions, is consistent with the general expected trend of declining cost-to-performance ratio over time of IT assets in general (Demirhan et al, 2007), and software in particular (Liebowitz & Margolis, 1999), where earlier entrants suffer cost disadvantages in comparison to followers. To try to counter this trend, packaged CMS developers appear to have chosen a new differentiation strategy against FLOSS CMS, by developing and marketing an increasing range of services to their clients (Adam & Light, 2004;Andersson & Nilsson, 1996).…”

Section: Discussionsupporting

confidence: 82%

A longitudinal analysis of trajectory changes in the software industry: the case of the content management application segment

Vitari

Ravarini

2009

European Journal of Information Systems

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The software industry is changing as a result of the rising influence both of packaged and of Free/Libre/Open Source Software (FLOSS), but the change trajectory of the industry is still not well understood. This article aims to contribute to clarifying software industry evolution through a longitudinal study, using Industry Change Trajectory Theory to explain and predict the evolution of the Content Management Systems (CMS) segment and the extent to which its results can be generalized to the overall software industry.Our data analysis shows that CMS players are experiencing a modification of their segments' change trajectory. While McGahan in 2004 recognized that the software industry was in a creative change trajectory, it has subsequently faced strong competition on its core assets, (i.e. applications) and the empirical results of our longitudinal study from 2002 to 2007 show the CMS segment is now in a radical change trajectory, due to the rapid obsolescence of its core activities. The paper discusses the changes affecting the segment, and proposes extending the outcome of the study to other segments of the software industry.

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Section: Discussionsupporting

confidence: 82%

A longitudinal analysis of trajectory changes in the software industry: the case of the content management application segment

Vitari

Ravarini

2009

European Journal of Information Systems

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“…There are many examples. In information systems: Viswanathan (2005) and Demirhan et al (2007), in marketing: Shi et al (2006), and in operations management: Kamrad and Siddique (2004) and Gans (2002). We thoroughly examine the impact of switching costs when competitive upgrade discount pricing is used and show that competing firms have the incentive to design their products in a way so that the switching costs are reduced.…”

Section: Related Literaturementioning

confidence: 99%

Competitive Behavior-Based Price Discrimination for Software Upgrades

Mehra

Bala

Sankaranarayanan

2012

Information Systems Research

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T he introduction of product upgrades in a competitive environment is commonly observed in the software industry. When introducing a new product, a software vendor may employ behavior-based price discrimination (BBPD) by offering a discount over its market price to entice existing customers of the competitor. This type of pricing is referred to as competitive upgrade discount pricing and is possible because the vendor can use proof of purchase of a competitor's product as credible evidence to offer the discount. At the same time, the competitor may offer a discount to its own previous customers in order to induce them to buy its upgrade. We formulate a game-theoretic model involving an incumbent and entrant where both firms can offer discounts to existing customers of the incumbent. Although several equilibrium possibilities exist, we establish that an equilibrium with competitive upgrade discount pricing is observed only for a unique market structure and a corresponding unique set of prices. In this equilibrium, instead of leveraging its first mover advantage, the incumbent cedes market share to the entrant. Furthermore, the profits of both the incumbent and the entrant reduce with switching costs. This implies that the use of BBPD has product design implications because firms may influence the switching costs between their products by making appropriate compatibility decisions. In addition, lower switching costs result in reduced consumer surplus. Hence, a social planner may want to increase switching costs. The resulting policy implications are different from those prevalent in other industries such as mobile telecommunications where the regulators reduced switching costs by enforcing number portability.

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“…This represents a reasonable assumption in many settings. For example, the very high customer churn (reported to range from 72% all the way up to 98% per year [4], [13]) that prevails in the ISP market points to little or no switching costs in that market. On the other hand, non-zero switching costs, in the form of contract breaking penalties and learning costs, are the norm in many settings.…”

Section: A Technology Valuationmentioning

confidence: 99%

“…As technologies, although IPv4 and IPv6 are incompatible, they are largely similar so that for the purpose of our model one can reasonably assume q 1 q 2 and β = 1. Because of their incompatibility, converters (gateways), e.g., see [5] for a representative recent proposal, are needed for IPv6 users to access the IPv4 content that is the bulk of today's Internet content and unlikely to become natively accessible over IPv6 any time soon 4 . Conversely, those converters also enable the reverse flow from IPv4 to IPv6, i.e., they are duplex converters, albeit not necessarily delivering the same performance in both directions, i.e., they can be asymmetric, so that both α 1 and α 2 are non-zero but not always equal.…”

Section: B User Decisionsmentioning

confidence: 99%

See 1 more Smart Citation

Modeling the Dynamics of Network Technology Adoption and the Role of Converters

Sen

Jin

Guérin

et al. 2010

IEEE/ACM Trans. Networking

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New network technologies constantly seek to displace incumbents. Their success depends on technological superiority, the size of the incumbent's installed base, users' adoption behaviors, and various other factors. The goal of this paper is to develop an understanding of competition between network technologies, and identify the extent to which different factors, in particular converters (a.k.a. gateways), affect the outcome. Converters can help entrants overcome the influence of the incumbent's installed base by enabling cross-technology interoperability. However, they have development, deployment, and operations costs, and can introduce performance degradations and functionality limitations, so that if, when, why, and how they help is often unclear. To this end, the paper proposes and solves a model for adoption of competing network technologies by individual users. The model incorporates a simple utility function that captures key aspects of users' adoption decisions. Its solution reveals a number of interesting and at times unexpected behaviors, including the possibility for converters to reduce overall market penetration of the technologies and to prevent convergence to a stable state; something that never arises in their absence. The findings were tested for robustness, e.g., different utility functions and adoption models, and found to remain valid across a broad range of scenarios. KeywordsTechnology adoption, diffusion, externality, converters, dynamics, equilibrium. This material is posted here with permission of the IEEE. Such permission of the IEEE does not in any way imply IEEE endorsement of any of the University of Pennsylvania's products or services. Internal or personal use of this material is permitted. However, permission to reprint/republish this material for advertising or promotional purposes or for creating new collective works for resale or redistribution must be obtained from the IEEE by writing to pubs-permissions@ieee.org. By choosing to view this document, you agree to all provisions of the copyright laws protecting it.This journal article is available at ScholarlyCommons: http://repository.upenn.edu/ese_papers/531 Abstract-New network technologies constantly seek to displace incumbents. Their success depends on technological superiority, the size of the incumbent's installed base, users' adoption behaviors, and various other factors. The goal of this paper is to develop an understanding of competition between network technologies, and identify the extent to which different factors, in particular converters (a.k.a. gateways), affect the outcome. Converters can help entrants overcome the influence of the incumbent's installed base by enabling cross-technology interoperability. However, they have development, deployment, and operations costs, and can introduce performance degradations and functionality limitations, so that if, when, why, and how they help is often unclear. To this end, the paper proposes and solves a model for adoption of competing network technologies by indivi...

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Strategic IT Investments: The Impact of Switching Cost and Declining IT Cost

Cited by 48 publications

References 34 publications

A longitudinal analysis of trajectory changes in the software industry: the case of the content management application segment

A longitudinal analysis of trajectory changes in the software industry: the case of the content management application segment

Competitive Behavior-Based Price Discrimination for Software Upgrades

Modeling the Dynamics of Network Technology Adoption and the Role of Converters

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