Abstract
Managerial decisions on the adoption of innovative technologies by a firm are made under conditions of uncertainty and must account for network externalities that imply the benefit of a technology is received not only from its intrinsic payoff, but also from the size of the network of other adopters. The theoretical model presented in this study demonstrates that for firms evaluating information technology investment with network effects key determinants of the technology selection pattern are adoption reversibility and switching costs. If switching costs are sufficiently high to make technology adoption irreversible then safer established technologies have an advantage as choosing a riskier untested technology opens the firm to the risk of being stranded without a network of followers. With lower switching costs, the technology adoption decision is reversible which provides an advantage to riskier untested technologies. A discussion of empirical evidence on adoption patterns in information technology provides application for the theoretical model.
Highlights
In the information technology (IT) area, managerial decisions on adoption of new innovative technologies face a number of challenges
Adoption of new technologies is explored through theoretical models that focus on mathematical modeling of the impact of various factors on the timing of technology choices made by the firm (Katz and Shapiro, 1986; Choi and Thum, 1998; Farzin et al, 1998; Hagspiel et al, 2015)
This study presents an original theoretical model that provides new analytical results on the role of switching costs and reversibility in the adoption decisions for IT markets that exhibit network externalities
Summary
In the information technology (IT) area, managerial decisions on adoption of new innovative technologies face a number of challenges. A prominent example of adapting the economic analysis of network externalities to IT investment decisions is presented by Au and Kauffman (2001) who model technology adoption for the electronic bill presentment and payment (EBPP) industry Their model considers a firm’s irreversible choice between two competing technologies – a safer established technology, and a riskier unproven technology that may turn out to be superior. The main contribution of this study is an original theoretical model that significantly extends the existing studies of Choi (1997) as well as Au and Kauffman (2001) While these studies suggest that there is an advantage to selecting the safer technology, the model constructed below identifies how with sufficiently low switching costs there are benefits to selecting the riskier technology which was the ultimate outcome in the Dell case as discussed by Krishnan and Bhattacharya (2002). The final section reviews managerial implications and provides a conclusion
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