MIS 9003 – Prof. Min-Seok Pang

Week 2 – Ray et al. (2009) – Joe

Ray, G., Wu, D., & Konana, P. (2009). Competitive environment and the relationship between IT and vertical integration. Information Systems Research20(4), 585-603.

As information technology(IT) can reduce coordination costs, the electronic markets hypothesis indicates that increased use of IT in the economy may suggest decreased levels of vertical integration (VI). The empirical work of related topics, however, contradicts previous research in the way that vertical integration (VI) has increased rather than decreased. The authors claim that the demand uncertainty and industry concentration, two measures of the competitive environment, can moderate the relationship between IT and VI.

The authors adopt firm-level IT spending data from 1995 to 1997 drawn from InformationWeek 500 that had been used in prior research. To overcome the simultaneity bias of VI and IT, the authors propose a 2-equation model to uncover the causality. The results suggest that in uncertain demand and in the unstable competitive environment, IT is associated with decreased VI. While in more predictable and concentrated environment, IT is associated with increased VI. Also, they find that firms made rational strategies about VI and IT in different competitive environments to decrease the coordination and production cost. Compared with the previous literature, this paper provides a more refined understanding of the relationship between IT and VI.

This article empirically addresses the key endogeneity issue, a firm will choose its IT investment given its VI level, and vice-a-versa, when people tried to discuss the benefit of IT on the use of markets for companies. It contributes to the literature by showing the difference in the use of IT across different competitive environments. The implication of this research is that the level of VI should be chosen strategically based on the nature of the competitive environment. The research question of this paper is clear and straightforward. This work could be a remarkable econ-IS paper in 2009.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.