OWNERSHIP AND INVESTMENT IN ELECTRONIC NETWORKS

We employ the theory of incomplete contracts to examine the relationsh ip between ownership and investment in electronic networks such as the Internet and interorganizational information systems. Electronic netw orks represent an institutional structure that has resulted from the i ntroduction of information technology in industrial and consumer marke ts. Ownership of electronic networks is important because it affects t he level of network-specific investments, which in turn determine the profitability, and in some cases the viability, of these networks. In our analysis we define an electronic network as a set of participants and a portfolio of assets. The salient concept in this perspective is the degree to which network participants are indispensable in making n etwork assets productive. We derive three main results. First, if one or more assets are essential to all network participants, then all the assets should be owned together. Second, participants that are indisp ensable to an asset essential to all participants should own all netwo rk assets. Third and most important, in the absence of an indispensabl e participant, and as long as the cooperation of at least two particip ants is necessary to create value, sole ownership is never the best fo rm of ownership for an electronic network. This latter result implies that as the leading network participants become more dispensable, we s hould see an evolution toward forms of joint ownership.