On Demand Web-based Services: Implications and Market Structure

This paper investigates the impact of a digitally enabled outsourcing-on demand web-based services-as a way to build a firm’s supply management infrastructure. In contrast with traditional proprietary infrastructure maintained by firms, this new IT architecture, in the form of on demand supply management infrastructure, is characterized by plug-and-play, as a result of standardization, and the shift of fixed cost investments to variable cost computing, with which the adopting firm can “pay-as-you-go.” We show that the availability of this new IT architecture to build a firm supply infrastructure would lead to a more competitive market as it reduces the entry barrier to a market. We also study technology adoption in the market. We find conditions when both the new and old approaches to build supply infrastructure may coexist in the market, and when the proprietary infrastructure may be completely replaced by the on demand supply infrastructure. The impact of this new IT architecture on firm profitability is also investigated. Interestingly, the impact depends on the type of competition in the market: the availability of on demand Web-based services greatly reduces firm profitability in markets where firms sell homogeneous products; however, in markets where firms sell differentiated products, the new IT architecture may help firms enhance their profitability at the expense of the consumers.