The Impact of Information Technology on Quality Improvement, Productivity, and Profits: An Analytical Model of a Monopolist

Empirical and analytic research in the IT and economics literatures have paid little attention to the distinction between the goals of cost reduction and quality improvement when examining the impact of IT investments on firm performance (i.e., firm profits and productivity). In this paper we present a simple analytical model that examines the impact of various types of IT investments on the quality and pricing decisions made by firms and on the economic performance of these firms. The model demonstrates that while investments in the technology types examined in this model are all expected to increase firm profits the impact of these investments on firm productivity vary and depend on the type of technology implemented. More specifically, the model demonstrates that a profit-maximizing firm may make a conscious decision to invest in certain technologies that lead to product quality improvements to capture higher profits, but sometimes at the expense of firm productivity.