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

Didem Demirhan (), Varghese S. Jacob () and Srinivasan Raghunathan ()
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Didem Demirhan: School of Management, The University of Texas at Dallas, P.O. Box 830688, Richardson, Texas 75083-0688
Varghese S. Jacob: School of Management, The University of Texas at Dallas, P.O. Box 830688, Richardson, Texas 75083-0688
Srinivasan Raghunathan: School of Management, The University of Texas at Dallas, P.O. Box 830688, Richardson, Texas 75083-0688

Management Science, 2007, vol. 53, issue 2, 208-226

Abstract: The declining cost of information technology (IT) over time provides the later entrant in information-intensive industries a cost advantage. On the other hand, the earlier entrant has the potential to build and retain its market share if consumers incur a cost in switching to the later entrant. We investigate the impact of a decline in the IT cost and the switching cost on IT investment strategies of firms. We find that a declining IT cost always hurts the early entrant's profit. The early entrant may assume an aggressive investment strategy or a defensive investment strategy in response to a decline in the IT cost, depending on whether the switching cost relative to the extent of decline in the IT cost is high or low, respectively. A decline in IT cost also hurts the later entrant's profit if the switching cost is high. A surprising result is that when the decline in the IT cost is higher than a critical value, a higher switching cost increases consumer surplus. When firms control the switching cost, the early entrant increases its investment in quality and switching cost and maintains its quality and its market-share leadership irrespective of the extent of decline in the IT cost.

Keywords: IT investment; late-mover cost advantage; declining IT cost; switching cost (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (22)

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