Strategic IT investments: the impact of switching cost and declining IT cost

Strategic IT investments: the impact of switching cost and declining IT cost

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Article ID: iaor20082169
Country: United States
Volume: 53
Issue: 2
Start Page Number: 208
End Page Number: 226
Publication Date: Feb 2007
Journal: Management Science
Authors: , ,
Keywords: computers: information
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.

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