Investment Coordination and Standardization in Electronic Markets

Abstract

When using electronic marketplaces as a method to exchange goods and services in business-to-business markets, investments are required to integrate this method of buying and selling into the internal systems of the market participants. These investments are typically information technology (IT) investments by buyers and sellers, and additionalinvestment by owners of the electronic market (EM). In our model we include specifications of the relationships within IT investments by buyers and sellers, the relationships between IT investments and EM investment, as well as the impact of increasing standardization of the market. We find that buyer and seller IT investments and EM investment can be coordinated so that a pure strategy Nash equilibrium obtains over a certain range of EM investment, and demonstrate that this continues to be true whether buyers and sellers are independent of the EM, or if subsets of buyers or sellers own the EM. In the latter case buyers or sellers that own the EM have higher IT investments. We also find that increasing standardization of the market increases equilibrium levels of EM investment.

Keywords: Electronic Markets, Information Technology Investment, Industrial Markets, Market Structure, Game Theory, Pricing Research