Electronic Data Interchange: Competitive Externalities and Strategic Implementation Policies

Eric T. G. Wang and Abraham Seidmann
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Eric T. G. Wang: Department of Information Management, School of Management, National Central University, Chung-Li, Taiwan 320, Republic of China
Abraham Seidmann: William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, New York 14627

Management Science, 1995, vol. 41, issue 3, 401-418

Abstract: Electronic Data Interchange (EDI) is an emerging type of standardized inter-organizational information system. We analyze the impact of EDI on the upstream suppliers' competitive position in a simple two-level hierarchical market structure where the buyer faces a linear demand curve and the competing heterogeneous suppliers have an upward-sloping marginal cost function. We show that a suppliers' adoption of EDI can generate positive externalities for the buyer and negative (or competitive) externalities for other suppliers. As a result, the buyer provides a price premium to those suppliers who adopt EDI and increases their sales volume and market share. Moreover, when the benefits that the buyer can derive from implementing EDI are substantial, and the suppliers' EDI adoption costs are high, it may be in the buyer's best interest to subsidize the suppliers so as to encourage them to adopt EDI, instead of mandating them to do so. Regardless of whether the buyer employs a mandatory or a subsidizing policy, the buyer and the end consumers may be the only ones who gain from this new technology. Consequently, a partial adoption by the supplier base may be optimal for the buyer when the suppliers' adoption costs are sufficiently high. We also show that, while EDI reduces the transaction costs of the buyer, the upstream market tends to become more concentrated as a result of increased cost differentials. These results provide one economic explanation of the fact that many companies have actually reduced their supplier base after implementing EDI, despite a significant reduction in their market transaction costs.

Keywords: electronic data interchange; competitive externalities; EDI adoption; implementation policies of interorganizational information systems (search for similar items in EconPapers)
Date: 1995
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