Proprietary and Open Systems Adoption: a Risk-augmented Transactions Cost Perspective

This article presents an economic model that enables the study of incentives for business-to-business (B2B) e-procurement systems investments which permit inventory coordination and improved operational control. We focus on the information technology (IT) adoption behavior of firms in the presence of transaction costs, agency costs and information uncertainty. But we conclude that it is appropriate to rethink the prior theory and develop an extended transactions cost theory perspective, following Clemons, et al. (1993), but with the possibility of shocks included. We distinguish among three kinds of B2B eprocurement systems platforms. Proprietary platform procurement systems involve traditional electronic data interchange (EDI) technologies. Open platform procurement systems are associated with e-markets Web technology. Hybrid platforms involve elements of both. The key drivers appear to be firm size and uncertainties that derive from the inability of a buyer firm to perfectly predict final retail demand and actual supply. We find that larger firms tend to adopt costlier solutions, but rely upon procurement technologies with more certain-to-deliver value, such as proprietary EDI. Smaller firms tend to adopt less costly procurement technologies that entail greater supply uncertainties, such as open platform procurement systems. We arrive at our findings through the specification of an analytical model that captures the key elements of our perspective—transaction costs, agency costs, information uncertainty, and shocks—and specifies the conditions under which strong conclusions can be made about the likely observed equilibrium e-procurement solutions of firms. _____________________________________________________________________________________