AN ECONOMIC-ANALYSIS OF THE INTRODUCTION OF AN ELECTRONIC DATA INTERCHANGE SYSTEM

Although electronic data interchange (EDI) holds the promise of signif icantly increasing the efficiency of business transactions, an install ed base of proprietary implementations has been detrimental to the wid espread acceptance of the technology. Thus, an important research issu e involves strategies for facilitating EDI adoption. We analyze the in troduction of an EDI system in a;vertical mark;et involving one manufa cturer and two suppliers. The manufacturer initiates an EDI network, a nd penalizes a supplier for not joining the system by reducing its vol ume of business with the supplier. Along with a ''stick,'' the manufac turer can also use a ''carrot'' in the form of a subsidy to partially offset a supplier's setup cost. The competition between the suppliers is characterized by incentive types for joining the EDI system (''moti vating'' or ''threatening'') and the Information Technology (IT) effic iency (''efficient'' or ''inefficient''). We show that regardless of i ts cost structure, a supplier may have to join the EDI network out oi ''strategic necessity,'' due to the presence of an IT-efficient suppli er, Our analysis further shows that depending on the supplier competit ion structure, the EDI system may prove to be a ''beneficial'' strateg ic necessity for a large supplier and an ''unfortunate'' strategic nec essity for a small supplier. Another key result is that by increasing the severity of the penalty, both the manufacturer and the follower su pplier can be worse off under certain conditions, The analysis of subs idy strategies reveals that unless leadership and followership positio ns are reversed due to a subsidy, subsidizing a supplier has no impact on the joining time of its competitor. Thus the EDI initiator cannot induce both, suppliers to join earlier by subsidizing one supplier, Al so, the larger the slack capacity of the leader, the higher (lower) th e manufacturer's incentive to subsidize the leader (follower). These r esults offer insights for initiators and adopters regarding penalty an d subsidy strategies, impact on competition structure,joining decision s and network growth.