Market Impact on IT Security Spending

Posted: 2 Jul 2013

See all articles by Bora Kolfal

Bora Kolfal

University of Alberta - Department of Accounting, Operations & Information Systems

Raymond Patterson

Independent

Lisa Yeo

Loyola University Maryland; University of Alberta - Department of Accounting, Operations & Information Systems

Date Written: June 14, 2013

Abstract

Traditionally, IT security investment decisions are made in isolation. However, as firms that compete for customers in an industry are closely interlinked, a macro perspective is needed in analyzing the IT security spending decisions and this is a key contribution of the paper. We introduce the notions of direct- and cross-risk elasticity to describe the customer response to adverse IT security events in the firm and competitor, respectively, thus allowing us to analyze optimal security investment decisions. Both symmetric and asymmetric cases are examined for a duopoly in a continuous-time Markov chain (CTMC) setting. We demonstrate that optimal IT security spending, expected firm profits and willingness of firms to cooperate with competitors to improve security are highly dependent on the nature of customer response to adverse events, especially whether customer response to adverse security events in the competitor increases or decreases firm demand.

Suggested Citation

Kolfal, Bora and Patterson, Raymond and Yeo, Melanie and Yeo, Melanie, Market Impact on IT Security Spending (June 14, 2013). University of Alberta School of Business Research Paper No. 2013-1052, Available at SSRN: https://ssrn.com/abstract=2279668

Bora Kolfal (Contact Author)

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada

Raymond Patterson

Independent

Melanie Yeo

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada

Loyola University Maryland ( email )

4501 North Charles Street
Baltimore, MD 21210-2699
United States
4106172937 (Phone)

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