Understanding the Business Value of Information Technology Investments: Theoretical Evidence from Alternative Market and Cost Structures

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-...

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