The impact of information technology on vertical relationships
This dissertation has three parts that study the impact of information technology on competition and vertical relationships from different perspectives. The first part focuses on an electronic market where product information is important for consumers to identify their ideal product and the Internet greatly reduces consumers’ search cost. The model studies how reduced search cost influences social welfare and retailers’ incentive to provide product information. It is found that if technology reduces consumers’ search cost to evaluate products and compare prices, sellers who invest in providing valuable information may not be able to recover their investments. Therefore, by lowering sellers’ incentive to prov vide product information, reduced search cost may negatively impact social welfare as consumers have to search more to identify their ideal product. The study also shows that sellers need to develop the capability of, and reputation for, information provision in order to make profits, even though some consumers and sellers may free ride. The second part extends the first model. In the second model, the manufacturer decides whether to distribute products through the electronic or the physical channel, or through both the channels. In the model, different channels have different search costs for consumers, different abilities to offer product information, and different reach to consumers. The model suggests that the manufacturer uses both the channels when product information is very valuable and product information is largely about digital attributes, or when the product information is not valuable. The model also suggests that when the manufacturer chooses to sell through both the channels the manufacturer need not sell through the most well-known electronic retailer. This part also discusses the case where the manufacture is vertically integrated. That is, the manufacturer itself operates in one of the channels. The third part continues the second part and focuses on firms’ vertical integration (VI) strategy. It examines firms included in 1995-1997 InformationWeek 500 and COMPUSTAT database to study the impact of competitive environment on how IT affects the level of vertical integration. It is found that the competitive environment moderates the impact of IT on vertical integration - in more dynamic environments IT is associated with a decrease in VI, and in more stable environments IT is associated with an increase in VI.