Journal of Management Information Systems

Volume 20 Number 2 2003 pp. 5-9

Special Section: Information Systems, Electronic Commerce, and Economics--The Interdisciplinary Research Frontier

Kauffman, Robert J and Bin, Wang

PRIOR RESEARCH ON INFORMATION SYSTEMS (IS) and electronic commerce has explored a wide spectrum of topics including information technology (IT) investments and strategic decision-making, IT adoption and diffusion, supply-chain management and business-to-business (B2B) electronic markets, information goods, and the bundling of software products. The six papers that we present in this Special Section of the Journal of Management Information Systems represent some of the newest thinking, adding significant insights to the existing body of theoretical and managerial knowledge in the field. Collectively, the new research that we present pushes the boundaries of what we know. The first paper employs real options thinking in a way that has never been used before. A second sheds light on how decision-makers benchmark against one another in evaluating the business value of an IT in order to decide when it is appropriate to adopt. The third paper shows how the codifiability of a product that is transacted in an electronically intermediated market plays a role in determining whether its exchange primarily occurs based on longer-term contracts or in spot markets. The papers also provide counterintuitive results that challenge our thinking about information goods and other products that are delivered via the Internet. A fourth paper explores how the incentives for a software vendor and the consumers of its products can be aligned through the bundling of a base product with add-in software capabilities. A fifth provides a new theoretical perspective on how contingent pricing can be used for information goods and services sold via the Internet. The final paper examines how profits from information goods can be protected through the optimal construction and enforcement of incompatible international standards in the presence of regional piracy. We believe that JMIS readers will see the high relevance of this work for the ongoing dialog between academic researchers, who will value the theoretical and methodological perspectives displayed, and industry practitioners, who will be interested in the new managerial findings and fresh perspectives.

The Special Section begins with a paper that answers the following questions: How should the evaluative process for large-scale investments in IT be conceptualized when there is a need to trade off decision-making speed with managerial uncertainties? What does a senior manager do when he or she wants to apply real options thinking, but is short on historical data and not all of the assumptions of the Black-Scholes model or the binomial model are met? Eric Clemons of the University of Pennsylvania and Bin Gu of the University of Texas, Austin, in a paper titled “Justifying Contingent Information Technology Investments: Balancing the Need for Speed of Action with Certainty Before Action,” deal with these questions. They develop and illustrate a new technique that is based on the theory of real options to help senior managers to frame the right choices of strategic actions among which they must select the most effective and value-bearing one. The authors suggest how to structure the analysis so that the investment actions can be staged as new information becomes available to the firm. They also emphasize the idea of chunkification, which they propose as a means to divide an IT project-related investment into a series of stages that permit sequential implementation as real options. To bring their message to a managerial audience, the authors examine preemptive strategies in the retail credit card business for industry leader. They analyze the potential business value associated with the implementation of sophisticated data mining systems that help to identify customers for which longer-term profit-maximizing product policies will be more effective than short-term policies to extract the greatest interest income. A unique aspect of this work compared to other real options approaches is that the authors present a technique that can be used even when the assumptions and historical data on asset prices and volatility that typically are required are not available.

The second paper explores a related set of issues: How does the process of information transmission among senior managers at different firms about the expected business value of IT investments affect the extent to which clustered or herd adoption is observed? And how does information transmission affect the propensity and timing of firms’ decisions to adopt? In “What Do You Know? Rational Expectations in Information Technology Adoption and Investment,” Yoris Au of the University of Texas, San Antonio, and Rob Kauffman of the University of Minnesota present a new theoretical perspective on IT adoption that incorporates the theory of rational expectations and adaptive learning from macroeconomics. The development of shared expectations creates a basis for senior management decision-makers to adopt in a “herd” fashion, rather than uniformly over time, as one might expect due to the heterogeneity of the business value that each firm will attribute to an IT innovation based on its own strategic situation. The authors present a series of propositions and an interpretative framework to determine the breadth of potential applications of the new theory. They also discuss three mini-cases—electronic bill payment and presentment, Wi-Fi wireless telecommunications, and XML software capabilities—that illustrate the application of the new theories for creating new insights for senior managers.

The next paper shifts the focus to supply-chain management-related issues. In particular, under what conditions is forward-contracting preferred to spot-purchasing in B2B e-market-based procurement as a value- maximizing business policy for the buyer firm? And, as a result, what kinds of transactions are appropriate to be handled in a B2B electronic market setting? In “Codifiability, Relationship-Specific Information Technology Investment, and Optimal Contracting,” Moti Levi of Pennsylvania State University, Paul Kleindorfer of the University of Pennsylvania, and D.J. Wu from the Georgia Institute of Technology explore how the relative codifiability of products will affect exchange in an electronic market. Codifiability is an indicator of how well the buyer and the supplier are able to agree upon a set of contractual specifications in a written electronic form for the goods or services that are to be exchanged. Based on an optimizing model that involves buyer selection of procurement contracts from many suppliers, the authors are able to show the sellers’ bidding strategies, the buyer’s optimal contract portfolio, and the conditions that result in a Nash equilibrium. The authors argue that lower transactional codifiability makes it less attractive for the buyer to purchase from a larger number of sellers and to procure in the spot market. In addition, they suggest that high investment levels in e-market IT transaction capabilities to support electronic codifiability will tend to reduce the number of contract-based purchases.

When software vendors bundle add-ins in software products, are consumers and producers better off, or is bundling add-ins only good for the vendors? The fourth paper in the Special Section, “Consumers Prefer Bundled Add-Ins,” by Rajiv Dewan and Marshall Freimer of the University of Rochester, explores vendor bundling strategies for profitability and consumer welfare relative to base software with add-in products using game theory. An add-in is a piece of software that adds to the functionality of a base product, such as an extension to an operating system or a plug-in for an Internet browser. The authors model the inclusion of a software add-in to the base software product in terms of customers who value the add-in and those who do not. For the latter, the all-in price of the bundle is likely to include what the customer perceives as a penalty component. The software vendor’s profits come from a number of different segments, including users who purchase just the base software and users who will purchase the base and add-in software together. The authors’ model reveals that the profit-maximizing price satisfies the conditions for a Nash equilibrium, and that the price for a bundled-based software with an add-in should be lower than the straight sum of the prices. A counterintuitive result is that the total surplus of all consumers increases when bundling leads to a higher profit level for the producer of the base software product. This apparent alignment of incentives between the software vendor and consumers provides an interesting commentary, adding caution to the claim in prior research that vendors tend to prefer bigger software bundles.

One characteristic of many IT products and services such as online trading execution, Internet service provision, and Web hosting is that product delivery and consumption are concurrent. To what extent is it appropriate for IT product and service vendors to offer rebates to customers when their products perform poorly, and how should they configure the related contingent prices? Do customers benefit from firms’ offering of rebates on goods and services that may be delivered with different levels of quality? Quality-contingent pricing is one means that firms have at their disposal to signal to potential customers about the quality of their IT products and services when uncertainty exists in the marketplace. Hemant Bhargava, University of California, Davis, and Shankar Sundaresan, Penn State University, explore how to effectively strategize about the offering of quality- contingent prices and customer rebates. Their paper, “Contingency Pricing for Information Goods and Services Under Industrywide Performance Standard,” develops a mathematical model that permits the analysis of monopoly and duopoly competitors who sell with quality-contingent prices. Bhargava and Sundaresan demonstrate the important role of private information about the firm’s ability to deliver a product or service at a given level of quality. They also find that contingent pricing is the dominant strategy for the firm when the market underestimates the quality of its goods and services. The work has implications for IT-intensive businesses that include telecommunications services, e-commerce, and information goods, as well as IT infrastructure and systems and transactions outsourcing services.

How should firms make business decisions to create disincentives for piracy in the market for DVD movies and related information goods? Is it appropriate to maintain regional standards for incompatibility? The final paper of the Special Section is “Economic Implications of Variable Technology Standards for Movie Piracy in a Global Context,” by Ram Chellappa and Shivendu Shivendu of the University of Southern California. At present, the primary approach to control information goods piracy is technological; for example, DVD makers and movie studios have created standard cryptographic codes that differ in various regions of the world, and that tie in with the capability of DVD players to decode the encoded discs. The authors develop a profit-maximization model to represent the producer’s disc quality, pricing, and compatibility choices. They find that in the presence of regionally incompatible standards, it is optimal for the movie studio to sell a higher-quality fully-enhanced DVD in one region with a higher price, and a lower-quality less-enhanced version in another region with a lower price. However, when two regions have consumers with different levels of willingness to pay, profit-maximizing DVD producers should build incentive compatibility into their pricing scheme so that the appropriate products are purchased by self-selecting consumers in the different regions.

The authors also show how to construct pricing policy in the presence of piracy for enhanced-quality DVDs by distinguishing between the movie studios’ need to pay information rents, which ensures incentive-compatible purchasing, and moral rents, which ensures that consumers of high morality will continue to exhibit legitimate purchasing behavior. Two managerial contributions in this research stand out. First, the authors show why it makes sense to offer different quality standards and prices in different regions when consumer willingness to pay and regional enforcement are different. Second, when widespread piracy is occurring, DVD producers will not find it profitable to produce enhanced-quality DVDs for consumers in developed countries, leading to a significant loss in welfare for both the producers and developed-country consumers.

Whenever we complete our work on a Special Section of papers for the JMIS, there is a round of thanks to share. This year, the main thanks go to our special issue reviewers, who started their work on the papers in early June 2002. They helped us to finalize papers for the Hawaii International Conference on System Sciences (HICSS) and then provided additional rounds of input on the revised papers that they read after the conference. Our process of obtaining an updated paper for review after the conference, as well as the reviewers’ input, ensures that the papers that the JMIS publishes here are well developed. Additional thanks are due to Rajiv Dewan of the University of Rochester, who handled most of the HICSS papers’ reviews. We also thank Eric Clemons for his invitation to Bin Wang to be a coeditor of this issue, based on her past participation in the conference and in the review processes of the past two or three years, and Vladimir Zwass for agreeing that her capabilities had developed to the point where she would be a strong contributor to the overall quality of the issue. Rob Kauffman thanks the HICSS Cochairs and the Editor for their continued contributions toward making the e-commerce economics and IT strategy mini-tracks premier opportunities each year for getting feedback on research in these areas, and the MIS Research Center at the University of Minnesota for supporting this work.

Key words and phrases