Corporate IT Standardization: Product Compatibility, Exclusive Purchase Commitment and Competition Effects

Abstract

When companies purchase IT products for their employees, departments or divisions, whether to standardize on one product or to allow the users to make their own choices is an important decision for IT managers to make. By consolidating demand and committing to buy from a single seller, standardization ensures product compatibility within corporation and has a potential to induce intense price competition among sellers, but this potential is subject to whether competing products are compatible and the relative competitive advantages of the sellers. This paper studies when it is optimal for an employer to commit to exclusive purchase from a single seller to enforce standardization, and sellers’ incentives to invest in mutual compatibility. Our results suggest that the employer is more likely to make such a commitment when the competing products are compatible, less vertically differentiated and/or more horizontally differentiated. We also find that the sellers agree to cooperate and invest in mutual compatibility only when the gap between their competitive advantages is moderate, but the availability of third party converters that enable partial compatibility can induce more collaboration among the sellers.

Keywords: Corporate IT Standardization, Product Compatibility, Network Effects, Exclusive Purchase Commitment, Competition Effects

JEL Classification: C7, D4, D6, D7, L1