Papers

We examine the role of AI analytics in facilitating innovation in firms that have gone through IPO. Using patent data on over 1,000 publicly traded firms, we find that firms acquiring AI analytics capability post-IPO experience less of a decline in innovation quality compared with similar firms that have not acquired that capability. This effect is greater when only machine learning capabilities are considered. Moreover, we find this sustained rate of innovation is driven principally by the continued development of innovations that combine existing technologies into new ones—a form of innovation that is especially well supported by analytics. By examining three main mechanisms that hampered post-IPO innovation, we find that AI analytics can ameliorate the pressure to meet short-term financial goals and disclosure requirements. However, it has limited effect in addressing managerial incentives. For firms with long product cycles, the disclosure effect is reduced to a greater extent than it is for those with short cycles. Overall, our results show the importance of examining technology as a critical input factor in innovation. We show that the increased deployment of AI analytics may reduce some of the innovative penalties suffered by IPOs and that investors and managers can potentially mitigate post-IPO reductions in innovative output by directing capital acquired in the IPO process to the acquisition of AI analytics capabilities. This paper was accepted by D. J. Wu, information systems. Funding: The authors appreciate the generous financial support from Wharton Dean’s Research Fund and Mack Institute for Innovation Management. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.01559 .

Start-ups are increasingly using social media to signal quality and provide information to potential investors. However, the effectiveness of social media on venture capital (VC) financing is likely to be heterogeneous, differing by demographic and network characteristics of the founders. In this paper, we examine whether social media use can improve funding outcomes for firms founded by women and by other people also lacking connections to the investor network, two groups that face greater difficulties in securing VC financing. Using Twitter data and data on VC investment in start-ups from Crunchbase, we explore the interaction effect between Twitter usage and gender and between Twitter usage and the network constraint measure. Overall, we show that social media can mitigate some disparities in financing experienced by these firms through improving information access. We find that this effect is stronger for first-time entrepreneurs than for experienced ones, stronger for attracting new investors than repeat ones, and stronger in more competitive markets. Collectively, these results suggest that social media could primarily help women and less connected individuals obtain financing by alleviating information asymmetry between founders and investors. This paper was accepted by D. J. Wu, information systems. Funding: The authors thank Wharton Mack Institute of Innovation Management for funding support. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4728 .

Data is the lifeblood of the digital economy. Much of the data in use today is generated by the everyday activities of consumers as they communicate, shop, travel, work, or engage in routine interactions with other consumers, businesses, and government entities through digital systems, platforms, and media. This has led to an enormous accumulation of data about individual consumers that can directly or indirectly provide information about their characteristics, preferences, activities, or behaviors.

Search and experience goods, as well as vertical and horizontal differentiation, are fundamental concepts of great importance to business operations and strategy. In our paper, we propose a set of theory-grounded data-driven measures that allow us to measure not only product type (search vs. experience and horizontal vs. vertical differentiation) but also sources of uncertainty and to what extent consumer reviews help resolve uncertainty. We used product rating data from Amazon.com to illustrate the relative importance of fit in driving product utility and the importance of search for determining fit for each product category at Amazon. Our results also show that, whereas ratings based on verified purchasers are informative of objective product values, the current Amazon review system appears to have limited ability to resolve fit uncertainty. Industry practitioners could utilize our approaches to quantitatively measure product positioning to support marketing strategy for retailers and manufacturers, covering an expanded group of products.

We examine the relationship between data analytics capabilities and innovation using detailed firm-level data. To measure innovation, we first utilize a survey to capture two types of firm practices, process improvement and new technology development for 331 firms. We then use patent data to further analyze new technology development for a broader sample of more than 2,000 publicly-traded firms. We find that data analytics capabilities are more likely to be present and are more valuable in firms that are oriented around process improvement and that create new technologies by combining a diverse set of existing technologies than they are in firms that are focused on generating entirely new technologies. These results are consistent with the theory that data analytics are complementary to certain types of innovation because they enable firms to expand the search space of existing knowledge to combine into new technologies, as well as the theoretical arguments that data analytics support incremental process improvements. Data analytics appear less effective for developing entirely new technologies or creating combinations involving a few areas of knowledge, innovative approaches where there is either limited data or limited value in integrating diverse knowledge. Overall, our results suggest firms that have historically focused on specific types of innovation—process innovation and innovation by diverse recombination—may receive the most benefits from using data analytics.

Data analytics technology can accelerate the innovation process by enabling existing knowledge to be identified, accessed, combined and deployed to address new problem domains. However, like prior advances in information technology, the ability of firms to exploit these opportunities depends on a variety of complementary human capital and organizational capabilities. We focus on whether analytics is more valuable in firms where innovation within a firm has decentralized groups of inventors or centralized ones. Our analysis draws on prior work measuring firm analytics capability using detailed employee-level data and matches these data to metrics on intra-firm inventor networks that reveal whether a firm’s innovation structure is centralized or decentralized. In a panel of 1,864 publicly-traded firms from the years 1988 to 2013, we find that firms with a decentralized innovation structure have a greater demand for analytics skills and receive greater productivity benefits from their analytics capabilities, consistent with a complementarity between analytics and decentralized innovation. We also find that analytics helps decentralized structures to create new combinations and reuse of existing technologies, consistent with the ability of analytics to link knowledge across diverse domains and to integrate external knowledge into the firm. Furthermore, the effect primarily comes from the analytics capabilities of the non-inventor employees as opposed to inventors themselves. These results show that the benefit of analytics on innovation depends on existing organizational structures. Similar to the IT-productivity paradox, these results can help explain a contemporary analytics-innovation paradox — the apparent slowdown in innovation despite the recent increase in analytics investments.

Secure messaging, or “e-visits,” between patients and providers has increased sharply in recent years, and many hope they will help improve healthcare quality while increasing provider capacity. Using a panel dataset from a large healthcare system in the United States, we find that e-visits trigger about 6% additional office visits, with mixed results on phone visits and patient health. These additional visits come at the sacrifice of new patients: physicians accept 15% fewer new patients each month following e-visit adoption. Our dataset on nearly 100,000 patients spans from 2008 to 2013, which includes the rollout and diffusion of e-visits in the health system we study. Identification comes from difference-in-differences estimates leveraging variation in the timing of e-visit adoption by both patients and providers. We conduct several robustness checks, including matching analyses and an instrumental variable analysis to account for possible time-varying characteristics among patient e-visit adopters.

We test the hypothesis that work practices complement IT investment, in part, by accelerating how rapidly employees acquire the skills needed to use new IT systems. We combine support request data from an EMR vendor with survey responses on work practices from 962 employees from 15 client nursing homes. Nursing homes using work practices that prior studies have shown to complement IT investment—those promoting discretion, teamwork, training, high staffing levels, and communication—experienced more rapid declines in requests for technical support. We then show that these benefits are due, in part, because the use of these work practices facilitates learning for workers in frontline occupations who otherwise may not have the freedom to experiment with and adapt the new technology systems. For many frontline workers, discretion was more important than training in explaining IT learning. Implications for the healthcare industry are discussed.

This study examines how characteristics of a firm’s labor-flow network affect firm productivity. Using employee job histories, we construct inter-firm labor-flow networks for both IT-labor and non-IT labor and analyze how a firm’s network structure for the two types of labor affects firm performance. We find that hiring IT workers from a structurally-diverse network of firms can substantially improve firm productivity, which is likely due to the novel and non-redundant information provided in such networks. Interestingly, we find the opposite effects for hiring non-IT labor, which is likely due to a structurally- cohesive network enabling frequent and repeated exposure to a common knowledge base that is beneficial for implementing complementary organizational practices especially when they are often complex and tacit. Together, these results demonstrate the importance of incorporating a network perspective in understanding the full impact of spillover effects from organizational hiring activities.

We empirically examine the impact of expanded product variety on demand concentration using large data sets from the movie rental industry as our test bed. We find that product variety is likely to increase demand concentration, which goes against the “Long Tail effect” theory predicting that demand would become less concentrated on “hit” products due to expanded product variety. We further provide evidence that this finding is not due to introducing many low-selling niche products as the intuition might suggest. Instead, we discover that increasing product variety diversifies the demand away from each movie title, but less significantly for hits than for niche products. In particular, we find that increasing product variety by 1,000 titles may increase the Gini coefficient of DVD rentals by 0.0029, which translates to increasing the market share of the top 1% of DVDs by 1.96% and the market share of the top 10% of DVDs by 0.58%. At the same time the market share of the bottom 1% of DVDs is reduced by 21.29% while the market share of the bottom 10% of DVDs is reduced by 5.28%. We rule out alternative explanations using a variety of “Long Tail” metrics, capturing movie format/distribution channel interaction and customer heterogeneity, while making use of instrumental variables.

Early stage firms increasingly use social media to communicate with their target stakeholders, such as customers and investors. In this study, we investigate whether the use of social media is associated with increased success in raising venture capital financing. We argue that social media can improve startup funding success through two channels: 1) enabling investor discovery of potential investment opportunities through reduction of search costs and 2) providing additional information to investors for a better evaluation of the quality of the ventures. Using social media activities on Twitter and venture financing data from CrunchBase, we find that an active social media presence and strong Twitter influence (followers, mentions, impressions, and sentiment) increase the likelihood a startup will close the round, the amount raised, and the breadth of the investor pool. In addition, we find that startup social media activity is associated with more investment from investors with less information channels (e.g., angels) and making less industry specialized investments in particular, consistent with the hypothesis that social media improves an investor’s ability to discover potential investments. Also, the effect size of social media is stronger for startups where quality information is less available, such as firms outside geographic venture capital clusters or where later investors do not have network relationships with early investors, consistent with social media acting as an additional information channel to inform startup quality evaluation.

The authors investigate whether electronic medical record (EMR) systems are associated with higher levels of nursing home performance. Their difference-in-differences analysis is based on a survey of health care information technology (HIT) use in approximately 304 New York State nursing homes, combined with regulatory data from Center for Medicaid and Medicare Studies (CMS) Nursing Home Compare database and the New York State RHCF-4 financial reports. For nursing home owners, the authors find a positive effect of EMR-system implementation, on the order of 1% higher productivity, 3% greater efficiency, and about 2.7% higher cost. They also find that EMR systems amplify the returns to modern workplace organization. Facilities that are 1 standard deviation higher on a work-organization scale—composed of practices that encourage employee collaboration, decision making, suggestions, and problem solving—have no adverse cost impact of adoption of HIT, and adoption of HIT is associated with a productivity increase of 1.5% or more. They find no evidence of an impact on health care quality.

Despite the rapid adoption of and increased spending on social media in the recent years, there is little existing research on the economic value of corporate social media investment or the factors that affect this value. In this study, we first provide empirical evidence using a large sample of firms across industries to show that firm market value increases with active social media usage, not just adoption. However, the return on using social media depends on having a larger number of employees with data analytics skills (rather than just IT skills), and this complementarity is increased if employees with data analytics skills are dispersed throughout the firm. Overall, these results suggest that the value of social media for firms lies in the firm’s ability to facilitate the gathering and use of external data, and that the use of social media becomes more valuable if a firm adjusts its human resource and organizational structure to facilitate data analysis and decision making.

As digitization of various economic and human behaviors become more prevalent, we examine whether data analysis capabilities can help with process- and innovation-oriented firm practices. Using detailed, firm level data on employee data analysis capabilities combined with a survey of organizational practices for 330 large firms, we find that while neither data skills nor process-related practices affect productivity directly, they have a substantial positive interaction. Specifically, firms with process-related practices receive a greater marginal benefit for the presence of or acquisition of data-related skills in their workforce. However, we do not find the same complementarities between data-related skills and innovation-oriented practices and at times the interaction can even be negative. These results are also unique to data-related skills and not IT skills generally. Overall these results highlight the potential tradeoffs of using data analytics at firm, similar to the tradeoffs between exploitation and exploration. We show that value of analytics (at least over our 1987-2007 sample period) is in enabling the use of internal and external data to drive process improvement, but data analytics capability does not immediately translate to greater innovation.

Despite the rapid adoption and increased spending on social media in the recent years, there is little existing research on the economic value of social media investment or the factors that affect this value. In this study, we first provide empirical evidence using a large sample of firm across industries to show firm market value is increasing in social media use, not just adoption. In addition, the value of social media investments are higher in firms that have a larger number of employees with data analytic skills (rather than just IT skills), and that this complementarity is increased when employees with data analytic skills are dispersed throughout the firm. Overall, these results suggest that value of social media for firms lies in its ability to facilitate the gathering and use of external data, and can be extracted more fully when a firm adjusts its human resource and organizational structure to facilitate data analysis and decision making.

The measurement of the impact of IT spillovers on productivity is an important emerging area of research. Studies of IT spillovers often adopt a ‘production function’ approach commonly used for measuring R&D spillovers, in which an external pool of IT investment is modeled using weighted measures of the IT investments of other firms, industries, or countries. We show that when using this approach, measurement error in a firm’s own IT inputs can create a significant upward bias on the estimated social returns to IT investment. This problem is particularly severe for estimating IT spillovers due to the high levels of measurement error in most available IT data. This bias can be addressed by using instrumental variable techniques to correct the measurement error in a firm’s own IT inputs. Using panel data on IT investment, we show that measurement error corrected estimates of IT spillovers are 40 to 90% lower than uncorrected estimates. This bias term is increasing in the correlation between the IT pool and firms’ own IT investment. Therefore, when instruments are not available, the use of fine-grained data on transmission paths can be an effective solution because IT spillover channels are more likely than R&D spillover channels to cut across industry boundaries, minimizing the correlation between a firm’s own IT investment and the constructed external IT pool. Implications for researchers, policy makers, and managers are discussed.

The movement of information technology (IT) workers among firms is believed to be an important mechanism by which know-how complementary to IT-related innovations diffuses throughout the economy. We use a newly developed source of employee micro-data – online resume databases – to model IT workers’ mobility patterns. We find that firms derive significant productivity benefits from the IT investments of other firms from which they hire IT labor. Our estimates indicate that over the last two decades, productivity spillovers from the IT investments of other firms transmitted through this channel have contributed 20-30% as much to a firm’s productivity growth as the firm’s own IT investments. Evidence for regional IT spillovers disappears when IT labor flows are directly used to measure the spillover pool. These effects are attributable specifically to the flow of IT workers among firms, not other occupations, ruling out some alternative explanations related to the similarity of firms that participate in the same labor flow network.

This article analytically and experimentally investigates how firms can best capture the business value of information technology (IT) investments through IT contract design. Using a small sample of outsourc- ing contracts for enterprise information technology (EIT) projects in several industries—coupled with reviews of contracts used by a major enterprise software maker—the authors determine the common provisions and structural characteristics of EIT contracts. The authors use these characteristics to develop an analytical model of optimal contract design with principal–agent techniques. The model captures a set of key characteristics of EIT contracts, including a staged, multiperiod project structure; learning; probabilistic binary outcomes; variable fee structures; possibly risk-averse agents; and implementation risks. The model characterizes conditions under which multistage contracts enable clients to create and capture greater project value than single-stage projects, and how project staging enables firms to reduce project risks, capture learning benefits, and increase development effort. Finally, the authors use controlled laboratory experiments to complement their analytical approaches and demonstrate robustness of their key findings.

This paper examines the relationship between information technology (IT) and trademarks. Using an 11-year panel data set (1987–1997) of IT capital stock, trademark holdings, and other measures for 116 Fortune 1000 manufacturing firms, we find that IT contributes to higher trademark holdings. Further, we find evidence suggesting that firms with more IT capital tend to apply for more new trademarks and retire existing trademarks more quickly, leading to a shorter trademark life cycle. Because trademarks are mainly used by firms to communicate differences among similar products to the marketplace, these results suggest that the business value of IT can be realized in greater product variety.

This paper uses newly collected panel data that allow for significant improvements in the measurement and modeling of information technology (IT) productivity to address some longstanding empirical limitations in the IT business value literature. First, we show that using generalized method of moments–based estimators to account for the endogeneity of IT spending produces coefficient estimates that are only about 10% lower than unadjusted estimates, suggesting that the effects of endogeneity on IT productivity estimates may be relatively small. Second, analysis of the expanded panel suggests that (a) IT returns are substantially lower in midsize firms than in Fortune 500 firms; (b) they materialize more slowly in large firms—in midsize firms, unlike in larger firms, the short-run contribution of IT to output is similar to the long-run output contribution; and (c) the measured marginal product of IT spending is higher from 2000 to 2006 than in any previous period, suggesting that firms, and especially large firms, have been continuing to develop new, valuable IT-enabled business process innovations. Furthermore, we show that the productivity of IT investments is higher in manufacturing sectors and that our productivity results are robust to controls for IT labor quality and outsourcing levels. Winner of ISR 2013 Best Paper Award

We combine new information technology (IT) offshoring and IT workforce microdata to investigate how the use of IT offshore captive centers is affecting the skill composition of the U.S. onshore IT workforce. The analysis is based on the theory that occupations involving tasks that are “tradable,” such as tasks that require little personal communication or hands-on interaction with U.S.-based objects, are vulnerable to being moved offshore. Consistent with this theory, we find that firms that have offshore IT captive centers have 8% less of their onshore IT workforce involved in tradable occupations; those without offshore captive centers have increased the proportion of onshore employment in these same occupations by 3%. In addition, we find that hourly IT workers (e.g., IT contractors) are disproportionately employed in tradable jobs, and their onshore employment is 2%–3% lower in firms with offshore captive centers. These findings persist after considering different measures of employment composition, including controls for human capital, firm performance, domestic outsourcing, and whether firms choose to build or buy software. Instrumental variables and corroborating regressions suggest that our estimates are conservative—the magnitude of the effect generally rises after accounting for reverse causality and measurement error. (Runner Up for 2014 Best Information Systems Paper In Management Science)

We gather detailed data on organizational practices and information technology (IT) use at 253 firms to examine the hypothesis that external focus—the ability of a firm to detect and therefore respond to changes in its external operating environment—increases returns to IT, especially when combined with decentralized decision making. First, using survey-based measures, we find that external focus is correlated with both organizational decentralization, and IT investment. Second, we find that a cluster of practices including external focus, decentralization, and IT is associated with improved product innovation capabilities. Third, we develop and test a three-way complementarities model that indicates that the combination of external focus, decentralization, and IT is associated with significantly higher productivity in our sample. We also introduce a new set of instrumental variables representing barriers to IT-related organizational change and find that our results are robust when we account for the potential endogeneity of organizational investments. Our results may help explain why firms that operate in information-rich environments such as high-technology clusters or areas with high worker mobility have experienced especially high returns to IT investment and suggest a set of practices that some managers may be able to use to increase their returns from IT investments.

This paper examines how information provided by online reviews influences firms’ pricing strategy for repeat purchase products. It is commonly understood that online reviews can reduce consumer uncertainty about product characteristics and, therefore, have the potential to increase product demand and firm profits. However, when considering repeat purchase products, online reviews have an additional effect in that they can alter consumers’ propensity to switch among products, which can intensify price competition and lead to lower profits. The strength of these potentially offsetting effects depends on the informativeness of consumer reviews, which is a function of both objective review accuracy and the ability of consumers to obtain information from reviews when their idiosyncratic preferences over product characteristics might differ from the preferences of reviewers. The interplay of these competing effects results in an S-shaped relationship between the quality of reviews and firm profits. There exists an optimal level of consumer informedness from the firms’ perspective, and competing firms may have incentives to facilitate consumer reviews in some markets but not others. Given firms’ strategic pricing, consumers may also be worse off as review informativeness increases.

This paper examines the drivers of adoption of Internet banking and the linkages among adoption drivers and outcomes (product acquisition, service activity, profitability, loyalty). We relate Internet banking adoption to customer demand for banking services, the availability of alternative channels, customers’ efficiency in service coproduction (“customer efficiency”), and local Internet banking penetration. We find that customers who have greater transaction demand and higher efficiency, and reside in areas with a greater density of online banking adopters, are faster to adopt online banking after controlling for time, regional, and individual characteristics. Consistent with prior work, we find that customers significantly increase their banking activity, acquire more products, and perform more transactions. These changes in behavior are not associated with short-run increases in customer profitability, but customers who adopt online banking have a lower propensity to leave the bank. Building on these observations we also find that the adoption drivers are linked to the postadoption changes in behavior or profitability. Customers who live in areas with a high branch density or high Internet banking penetration increase their product acquisition and transaction activity more than Internet banking adopters in other regions. Efficient customers and those with high service demand show greater postadoption profitability.

The new business practices and information structures associated with information technology (IT) account for a significant fraction of the market value of modern firms. We use a new IT data series along with Hall’s Quantity Revelation Theorem to measure the amount of IT-related intangible capital (ITIC) in US firms. We find that the prices of ITIC have fluctuated due to dot-com boom and bust valuations. However, with the exception of a brief slowdown in 2001, ITIC quantities have been steadily increasing through 2005. In the average firm in 2005, IT-related intangible capital was about one quarter of the value of physical capital. We also estimate that IT-related intangible capital depreciates at a rate of about 6-8% a year, which is closer to the estimated depreciation rate for physical capital than for R&D capital. Implications for managers and policy makers are discussed.

Consumer reviews may reflect not only perceived quality but also the difference between quality and price (perceived value). In markets where product prices change frequently, these price-influenced reviews may be biased as a signal of product quality when used by consumers possessing no knowledge of historical prices. In this paper, we develop an analytical model that examines the impact of price-influenced reviews on firm optimal pricing and consumer welfare. We quantify the price effects in consumer reviews for different formats of review systems using actual market prices and online consumer ratings data collected for the digital camera market. Our empirical results suggest that unidimensional ratings, commonly used in most review systems, can be substantially biased by price effects. In fact, unidimensional ratings are more closely correlated with ratings of product value than ratings of product quality. Our findings suggest the importance for firms to account for these price effects in their overall marketing strategy and suggest that review systems could better serve consumers by explicitly expanding review dimensions to separate perceived value and perceived quality.

IT jobs requiring interpersonal interaction or physical presence in fixed locations are less likely to be sent out of the country. (Sorry… download not available)

Online product reviews may be subject to self-selection biases that impact consumer purchase behavior, online ratings’ timeseries, and consumersurplus. This occurs if early buyers hold different preferences than do later consumers about the quality of a given product. Readers of early product reviews may not successfully correct for these preference differences when interpreting ratings and making purchases. In this study, we develop a model that examines how idiosyncratic preferences of early buyers can affect long-term consumer purchase behavior as well as the social welfare created by review systems. Our model provides an explanation for the structure of product ratings over time, which we empirically test using online book reviews posted on Amazon.com. Our analysis suggests that firms could benefit from altering their marketing strategies such as pricing, advertising, or product design to encourage consumers likely to yield positive reports to self-select into the market early and generate positive word-of-mouth for new products. On the other hand, self-selection bias, if not corrected, decreases consumer surplus.

This paper proposes using nonlinear mixed-integer programming to solve the customized bundle-pricing problem in which consumers are allowed to choose up to N goods out of a larger pool of J goods. Prior work has suggested that this mechanism has attractive features for the pricing of information and other low-marginal cost goods. Although closed-form solutions exist for this problem for certain cases of consumer preferences, many interesting scenarios cannot be easily handled without a numerical solution procedure. In this paper, we investigate the efficiency gains created by customized bundling over the alternatives of pure bundling or individual sale under different assumptions about customer preferences and firm cost structure, as well as the potential loss of efficiency caused by pricing with incomplete information about consumer reservation values. Our analysis suggests that customized bundling enhances sellers’ profits and enhances welfare when consumers do not place positive values on all goods, and that this consumer characteristic is much more important than the shape of the valuation distribution in determining the optimal pricing scheme. We also find that customized bundling outperforms both pure bundling and individual sale in the presence of incomplete information, and that customized bundling still outperforms other simpler pricing schemes even when exact consumer valuations are not known ex ante

We explore how broadband access drives changes in the quantity and diversity of consumption of online content by using panel data that describes household Internet usage before and after broadband adoption. Our data suggests that on average, broadband adoption increases usage by over 1300 minutes per month. We also find that information consumption becomes more evenly distributed within the population, driven in part by post-adoption usage gains of almost 1800 minutes per month among individuals who were in the lowest usage quintile before adopting broadband. After adopting broadband, this pre-adoption lowest-usage quintile consumes content in greater quantities than users in neighboring quintiles, passing both the second and third quintiles in terms of absolute usage. This suggests that these users may have had strong preferences for high-bandwidth content that was too costly to consume in a narrowband environment. We also show that broadband adoption increases the variety of content that users consume although many of these gains appear to be associated with an increase in the variety of sites visited within previously visited content categories rather than an expansion in the types of content consumed.

Innovations in technology and service design have increasingly enabled firms to incorporate self-service technology to augment or substitute for “traditional” employee-provided service channels. Although it is clear that self-service can reduce cost, less is known about how customers utilize self-service channels in a multichannel service delivery system and the resulting impact on firm performance. An important aspect of service operations is that customers are coproducers of the service. Thus, the performance of the delivery system and customers’ use of service channels can be affected by customers’ own efficiency or productivity in service coproduction (customer efficiency). In this paper, we utilize prior theoretical frameworks in service operations and economics to hypothesize relationships among customer characteristics (especially coproduction efficiency), channel utilization, and firm performance. We then test these hypotheses using panel data from a large retail bank. Overall, we find that higher customer efficiency in self-service channels is associated with greater profitability and has a complex relationship with customer retention and product utilization.

We analyze how online reviews are used to evaluate the effectiveness of product differentiation strategies based on the theories of hyperdifferentiation and resonance marketing. Hyperdifferentiation says that firms can now produce almost anything that appeals to consumers and they can manage the complexity of the increasingly diverse product portfolios that result. Resonance marketing says that informed consumers will purchase products that they actually truly want. When consumers become more informed, firms that provide highly differentiated products should experience higher growth rates than firms with less differentiated offerings. We construct measures of product positioning based on online ratings and find supportive evidence using sales data from the craft beer industry. In particular, we find that the variance of ratings and the strength of the most positive quartile of reviews play a significant role in determining which new products grow fastest in the marketplace. This supports our expectations for resonance marketing.

What determines vertical scope? Transactions cost economics (TCE) has been the dominant paradigm for understanding “make” vs. “buy” choices. However, the traditional focus on empirically validating or refuting TCE has taken attention away from other possible drivers of scope, and it has rarely allowed us to understand the explanatory power of TCE versus other competing theories. This paper, using a particularly rich panel dataset from the Mortgage Banking industry, explores both the extent to which TCE predictions hold, and their ability to explain the variance in scope, when compared to all other possible drivers of integration. Using some direct measures of transaction costs, we observe that integration does mitigate risks; yet such risks and transaction costs do not seem to drive firm-level decisions of integration in retail production of loans. Rather, capability-driven and capacity- (or limit to growth-) driven considerations explain a significant amount of variance in our sample, under a variety of specifications and tests. We thus conclude that while TCE explanations of vertical scope are important, their impact is dwarfed by capability differences and by the desire of firms to leverage their capabilities and productive capacity by using the market.

With declining costs of distributing digital products comes renewed interest in strategies for pricing goods with low marginal costs. In this paper, we evaluate customized bundling, a pricing strategy that gives consumers the right to choose up to a quantity M of goods drawn from a larger pool of N different goods for a fixed price. We show that the complex mixed-bundle problem can be reduced to the customized-bundle problem under some commonly used assumptions. We also show that, for a monopoly seller of low marginal cost goods, this strategy outperforms individual selling (M=1) and pure bundling (M=N) when goods have a positive marginal cost or when customers have heterogeneous preferences over goods. Comparative statics results also show that the optimal bundle size for customized bundling decreases in both heterogeneity of consumer preferences over different goods and marginal costs of production. We further explore how the customized-bundle solution is affected by factors such as the nature of distribution functions in which valuations are drawn, the correlations of values across goods, and the complementarity or substitutability among products. Altogether, our results suggest that customized bundling has a number of advantages—both in theory and practice—over other bundling strategies in many relevant settings.

We address the concept of poaching, the risk that in any transactional relationship, information that is transferred between parties for purposes specified in the contract will deliberately be used by the receiving party for purposes outside the contract, to its own economic benefit, and to the detriment of the party that provided the information. We argue that this form of transactional risk, a component of transaction costs, is increasingly important in our service-centered, information-driven, postindustrial economy. Using case examples and a discussion of the related literature, we demonstrate and discuss the conditions under which shared information creates the potential for poaching, examine the impact and efficacy of traditional remedies for contractual problems in managing poaching, and identify additional mechanisms for managing poaching risk. Our analysis suggests that these risks and their remedies are fundamentally different in nature from those considered in previous theories of supplier relations and contractual governance.

The growth in the information technology (IT) services market and the increasing tendency of firms to outsource some or all of their IT functions necessitate better mechanisms for selecting IT vendors. For most projects, there are a multitude of potential vendors that differ in quality and other aspects that are difficult to assess at the time of contracting. In addition, many projects have outcomes that are difficult to measure or verify by outside parties. As a result, mechanisms that require verifiability of outcome, such as incentive contracting, only provide limited benefits in vendor selection and in some cases are ineffective or counterproductive. This article presents an alternative mechanism for selecting high-quality vendors using a 2-stage contract. In the first stage, the client engages a vendor for a pilot project and observes the outcome. Using this observation, the client decides whether to continue the project to the second stage on prespecified terms or to terminate the project. By setting compensation for the pilot sufficiently low and establishing a threshold performance level for continuation, the client can offer a contract that is only attractive to high-quality vendors. Using game theoretic analysis we find that this contract performs better for the client than selection among seemingly equally qualified vendors. This mechanism is useful in settings where vendor quality is uncertain, and especially in situations in which a pilot project is undertaken for other reasons (e.g., demonstrating technical feasibility), where the benefits of this contracting mechanism can be realized at little incremental cost. Download is the prior conference version. See journal for the published version.

Internet-enabled markets are becoming viable venues for procurement of professional services. We investigate bidding behavior within the most active area of these early knowledge markets—the market for software development. These markets are important both because they provide an early view of the effectiveness of online service markets and because they have a potentially large impact on how software development services are procured and provided. Using auction theory, we develop a theoretical model that relates market characteristics to bidding and transaction behavior, taking into account costly bidding. We then test our model using data from an active online market for software development services, which yields contracts for 30%–40% of posted projects. In its current format, however, the studied market may induce excessive bidding by vendors. Consistent with our theoretical predictions and those of Carr (2003), higher-value projects attract significantly more bids, with lower average quality. Greater numbers of bids raise the cost to all participants, due to costly bidding and bid evaluation. Perhaps as a consequence, higher-value projects are also much less likely to be awarded.

We explore the effect of computerization on productivity and output growth using data from 527 large US firms over 1987-1994. We find that computerization makes a contribution to measured productivity and output growth in the short term (using one year differences) that is consistent with normal returns to computer investments. However, the productivity and output contributions associated with computerization are up to five times greater over long periods (using five to seven year differences). The results suggest that the observed contribution of computerization is accompanied by relatively large and time-consuming investments in complementary inputs, such as organizational capital, that may be omitted in conventional calculations of productivity. The large long-run contribution of computers and their associated complements that we uncover may partially explain the subsequent investment surge in computers in the late 1990s. (Download is the pre-publication draft. See journal for final version).

Although considerable research examines the effect of telecommuting on worker productivity and quality of work life, less analysis addresses the managerial problems associated with selecting, monitoring and compensating telecommuters. We propose a model based on contract theory to analyze some key managerial decisions on telecommuting, specifically: 1) What factors influence the manager’s decision to support telework, 2) How managers should decide which workers will have the opportunity to telecommute, and 3) How managers should monitor and provide incentives to workers who participate in telecommuting programs. Based on the model, we find that managers ’ willingness to allow telecommuting is related to the amount of information they have about their employees and that employees who telecommute should have incentives based both on subjective evaluations and objective performance measures. We also find that telecommuting is influenced by the productivity difference between home and office, the role of teamwork, and the outside benefits of working at home. Using data from the 1998 Workplace Employment Relationship Survey (WERS98), we test these predictions and find that most of our hypotheses are supported by the data.

This paper investigates the proposition that the widespread use of information technology has increased investment in intangible organizational assets. Using firm-level data, we find that each dollar of installed computer capital in a firm is associated with at least five dollars of market value, after controlling for other assets. We interpret this value as revealing the existence of a large stock of intangible assets that are complementary with computer investment. Using data on organizational practices at each firm, we identify a specific cluster of practices that appear to represent at least some portion of these intangible assets. Not only are these practices correlated with computer investments, but firms that combine higher computer investments with these organizational characteristics have disproportionate increases in their market valuations. We conclude that investors believe that the contribution of computers is increased when they are combined with certain intangible assets, specifically including the cluster of organizational changes that we have identified. (Download is pre-publication draft. Please see Journal for final version)

The ability to retain and lock in customers in the face of competition is a major concern for online businesses, especially those that invest heavily in advertising and customer acquisition. In this paper, we develop and implement an approach for measuring the magnitudes of switching costs and brand loyalty for online service providers based on the random utility modeling framework. We then examine how systems usage, service design, and other firm- and individual-level factors affect switching and retention. Using data on the online brokerage industry, we find significant variation (as much as a factor of two) in measured switching costs. We find that customer demographic characteristics have little effect on switching, but that systems usage measures and systems quality are associated with reduced switching. We also find that firm characteristics such as product line breadth and quality reduce switching and may also reduce customer attrition. Overall, we conclude that online brokerage firms appear to have different abilities in retaining customers and have considerable control over their switching costs.

Enterprise Resource Planning (ERP) software system integrates key business and management processes within and beyond a firm’s boundary. While the business value of ERP implementations have been extensively debated in IT trade periodicals in the form of qualitative discussion or detailed case studies, there is little large sample statistical evidence on who adopts ERP and whether the benefits of ERP implementation exceed the costs (and risks). With multi-year multi-firm ERP implementation and financial data, it is found that larger firms (and those with slightly better performance) tend to invest in ERP. Even though there is a slowdown in business performance and productivity shortly after the implementation, financial markets consistently reward the adopters with higher market valuation (as measured by Tobin’s q). Due to the lack of mid- and long-term post implementation data, future research on the long run impact of ERP is proposed.

Many service firms are pursuing electronic distribution strategies to augment existing physical infrastructure for product and service delivery. But little systematic study has been made for whether and how characteristics or behaviors might differ between customers who use electronic delivery systems and those who use traditional channels. We explore these differences by comparing customers who utilize personal-computer-based home banking (PC banking) to other bank customers. Case studies and detailed customer data from four institutions suggest that PC banking customers are apparently more profitable, principally due to unobservable characteristics extant before the adoption of PC banking. Demographic characteristics and changes in customer behavior following adoption of PC banking account for only a small fraction of overall differences. It also appears that retention is marginally higher for customers of the online channel.

Previous research has examined whether price dispersion exists in theoretically highly efficient Internet markets. However, much of the previous work has been focused on industries with low cost and undifferentiated products. In this paper, we examine the presence of price dispersion and product differentiation using data on the airline ticket offerings of online travel agents (OTAs). We find that different OTAs offer tickets with substantially different prices and characteristics when given the same customer request. Some of this variation appears to be due to product differentiation—different OTAs specialize by systematically offering different trade-offs between ticket price and ticket quality (minimizing the number of connections, matching requested departure and return time). However,even after accounting for differences in ticket quality, ticket prices vary by as much as 18% across OTAs. In addition,OTAs return tickets that are strictly inferior to the ticket offered by another OTA for the same request between 2.2% and 28% of the time. Overall, this suggests the presence of both price dispersion and product differentiation in the online travel market.

We investigate the hypothesis that the combination of three related innovations, 1) information technology (IT), 2) complementary workplace reorganization, and 3) new products and services, constitute a significant skill-biased technical change affecting labor demand in the United States. Using detailed firm-level data, we find evidence of complementarities among all three of these innovations in factor demand and productivity regressions. In addition, firms that adopt one or more of these innovations tend to use more skilled labor. The effects of IT on labor demand are greater when IT is combined with the particular organizational investments we identify, highlighting the importance of IT- enabled organizational change. (Download is a prepublication draft – see journal for final version)

Some implications of e-Commerce financial services firms are becoming clear. The web drives transparency, and increases the information endowment of all market participants. It is harder to manipulate customers’ behavior, or to overcharge them. Transparency drives differential pricing. Not all customers can or should be charged the same prices. Transparency reduces the viability of cross-subsidies between consumers or between products. The differential pricing enabled by the web transforms distribution channels, and enables direct distribution and alternative forms of distribution. Some intermediaries may be bypassed altogether while others may lose their best, most profitable, and previously most loyal customers. (link is to pre-publication draft at SSRN)

Price dispersion, the variance in price for identical products across retailers, is a persistent feature of Internet- based markets, even those mediated by shopping agents (shopbots). In this paper, we propose a model for explaining this price dispersion based on limited consumer awareness of competing retailers and brand sensitivity, the willingness to pay a premium to buy from a leading retailer. We show that full awareness and the absence of brand sensitivity are necessary for markets to be characterized by Bertrand competition. When both of these are not simultaneously true (which is likely for most Internet markets), a number of other pricing strategies become optimal. Branded (high awareness) retailers tend to charge higher prices on average, but in some circumstances will randomize their prices such that they will be lower price than unbranded retailers on some products or some of the time. We also show that even if an unbranded retailer can invest to improve awareness, they have weak incentives to do so as this increases price competition. These observations are consistent with empirical research on pricing in Internet-based markets and may offer a more complete story of Internet price dispersion than some of the leading alternative explanations.

Previous research suggests that a decline in transactions costs leads to improved economic efficiency. In this paper, we show that such a decline will introduce increasingly uninformed consumers into established markets. Using a model of financial market inefficiency, we show that this increase in uninformed individuals can increase market risk (volatility), can decrease efficiency, and may reduce social welfare even when market participantsareperfectlyrational. Wethentestthepredictionsofourmodelusingdataontheretailequities market. Our results suggest that securities that have a large proportion of small trades (presumably dispro- portionately from small, online retail investors) tend to be less efficient by conventional measures, consistent with our model predictions.

To understand the economic value of computers, one must broaden the traditional definition of both the technology and its effects. Case studies and firm-level econometric analyses suggest that: 1) organizational “investments” have a large influence on the value of IT investments; and 2) the benefits of IT investment are often intangible and disproportionately difficult to measure. Our analysis suggests that the link between IT and increased productivity emerged well before the recent surge in the aggregate productivity statistics and that the current macro evidence may understate current IT-enabled productivity growth.

Previous literature has suggested that information technology (IT) can affect firm boundaries by changing the costs of coordinating economic activity within and between firms (internal and external coordination). This paper examines the empirical relationship between IT and firm structure and evaluates whether this structure is consistent with prior arguments about IT and coordination. We formulate an empirical model to relate the use of information technology capital to vertical integration and diversification. This model is tested using an 8-year panel data set of information technology capital stock, firm structure, and relevant control variables for 549 large firms. Overall, increased use of IT is found to be associated with substantial decreases in vertical integration and weak increases in diversification. In addition, firms that are less vertically integrated and more diversified have a higher demand for IT capital. While we cannot rule out all alternative explanations for these results, they are consistent with previous theoretical arguments that both internal and external coordination costs are reduced by IT.

The financial services industry is the major investor in information technology in the U.S. economy; the typical bank spends as much as 15% of non-interest expenses on IT. A persistent finding of research into the performance of financial institutions is that performance and efficiency vary widely across institutions. Nowhere is this variability more visible than in the outcome of the IT investment decisions in these institutions. This paper presents the results of an empirical investigation of IT investment decision processes in the banking industry. The purpose of this investigation is to uncover what, if anything, can be learned from the IT investment practices of banks that would help in understanding the cause of this variability in performance along with pointing toward management practices that lead to better investment decisions. Using PC banking and the development of corporate Internet sites as the case studies for this investigation, the paper reports on detailed field-based surveys of investment practices in several leading institutions.

Computers are the catalyst for bigger changes. (Download not available – see Journal link)

This paper examines the relationship between information technology (IT) and the organizational architecture of firms. Firms that are extensive users of information technology tend to adopt a complementary set of organizational practices that include: Decentralization of decision authority, emphasis on subjective incentives, and a greater reliance on skills and human capital. We explore these relationships using detailed data on work systems and information technology spending for 273 large firms. Overall, we find that increased investment in IT is linked to a system of decentralized authority and related practices. Our findings may help resolve some of the questions about the relationships of information technology to internal organizational and provide insight into the optimal organization of knowledge work. (download not available – see Journal or JSTOR)

The “productivity paradox” of information systems (IS) is that, despite enormous improvements in the underlying technology, the benefits of IS spending have not been found in aggregate output statistics. One explanation is that IS spending may lead to increases in product quality or variety which tend to be overlooked in the aggregate statistics, even if they increase output at the firm-level. Furthermore, the restructuring and cost-cutting that are often necessary to realize the potential benefits of IS have only recently been undertaken in many firms. Our study uses new firm-level data on several components of IS spending for 1987-1991. The dataset includes 367 large firms which generated approximately 1.8 trillion dollars in output in 1991. We supplemented the IS data with data on other inputs, output, and price deflators from other sources. As a result, we could assess several econometric models of the contribution of IS to firm-level productivity. Our results indicate that IS spending has made a substantial and statistically significant contribution to firm output. We find that the gross marginal product (MP) for computer capital averaged 81% for the firms in our sample. We find that the MP for computer capital is at least as large as the marginal product of other types of capital investment and that, dollar for dollar, IS labor spending generates at least as much output as spending on non-IS labor and expenses. Because the models we applied were similar to those that have been previously used to assess the contribution of IS and other factors of production, we attribute the different results to the fact that our data set is more current and larger than others explored. We conclude that the productivity paradox disappeared by 1991, at least in our sample of firms.

The business value of information technology (IT) ha been debated for a number of years. While some authors have attributed large productivity improvement and substantial consumer benefits to IT, others report that IT has not had any bottom line impact on business profitability. This paper focuses on the fact that while productivity, consumer value, an business profitability are related, they are ultimately separate questions. Accordingly, the empirical results on IT value depend heavily on which question is being addressed and what data are being used. Applying methods based on economic theory, we are able to define and examine the relevant hypotheses for each of these three questions, using recent firm-level data on IT spending by 370 large firms. Our findings indicate that IT has increased productivity and create substantial value for consumers. However, we do not find evidence that these benefits have resulted in supranormal business profitability. We conclude that while modeling techniques need to be improved, these results are collectively consistent with economic theory. Thus, there is no inherent contradiction between increased productivity, increased consumer value, and unchanged business profitability. (Winner of the 1996 Best Paper Award) (No download available at the moment – see Journal)

Despite evidence that information technology (IT) has recently become a productive investment for a large cross-section of firms, a number of questions remain. Some of these issues can be addressed by extending the basic production function approach that was applied in earlier work. Specifically, in this short paper we: 1) control for individual firm differences in productivity by employing a “firm effects” specification, 2) consider the more flexible translog specification instead of only the Cobb-Douglas specification, and 3) allow all parameters to vary between various subsectors of the economy. We find that while “firm effects” may account for as much as half of the productivity benefits imputed to IT in earlier studies, the elasticity of IT remains positive and statistically significant. We also find that the estimates of IT elasticity and marginal product are little-changed when the less restrictive translog production function is employed. Finally, we find only limited evidence of differences in IT’s marginal product between manufacturing and services and between the “measurable” and “unmeasurable” sectors of the economy. Surprisingly, we find that the marginal product of IT is at least as high in firms that did not grow during 1988-1992 sample period as it is in firms that grew. (Early working paper version available… see journal for final version)

The fabrication and performance of p-channel germanium MOSFETs having a nitrided native oxide gate insulator are reported. A self-aligned dummy-gate process suitable for circuit integration is utilized. Common-source characteristics exhibit no looping and indicate a peak room-temperature channel mobility of 770 cm^2/V-s. These results provide further evidence that a high-performance germanium CMOS technology is possible. (no download is available – see journal link)