Investment in Information Technology with Strategic Interactions: A Game Theoretic Model and External Validation

Abstract

Justification of investments in IT for office automation and transaction processing is relatively easy since associated costs and benefits are easy to identify. However, IT is increasingly viewed as a source of strategic advantage. The deployment of IT to support strategic goals is difficult to rationalize since costs and benefits of IT for this purpose are not easy to identify. An economic model to investigate how firms make decisions regarding the levels of IT investments is developed. In this game-theoretic model, substitutability of products provides the strategic link between firms. The model aids in investigating the level of IT investment and its sensitivity to intensity of competition in the product market. The conclusions are: 1) the level of investment in IT depends on the degree of competition in the industry; IT investments decrease with the level of competition, 2) prices of the products are reduced when cost-saving IT investment is utilized, and 3) IT investments result in higher profits. These results provide a theoretical basis to test that the level and intensity of investments in IT decrease with the degree of competition in an industry. This result of the paper is validated using empirical data. Two cases are presented to further augment the above results. The limitations of the model including opportunities for further research are identified. Based on the preliminary evidence presented in the paper, the conventional wisdom that IT investment is positively associated with industry competition needs further investigation.

Keywords:

• Business value
• information technology
• strategic information systems
• game theory
• IT investment
• competition.

Additional information

Notes on contributors

Vijay K. Vemuri

Vijay K. Vemuri is an Assistant Professor of Management Information Systems at C.W. Post Campus of Long Island University. He received a Ph.D. in Business Administration from the University of Illinois at Urbana-Champaign. His research interests include electronic commerce, strategic implications of information technology and networking infrastructure. He has published in the European Journal of Operational Research, and Electronic Markets. He is currently Book Review Editor of JITCA. He can be reached at [email protected].