Migration to Open-Standard Interorganizational Systems: Network Effects, Switching Costs, and Path Dependency

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Abstract

As firms seek to improve coordination through the use of electronic interorganizational systems (IOS), open standards are becoming increasingly important. To better understand the process of standards diffusion, we investigate firms’ migration from proprietary or less-open IOS (i.e., electronic data interchange or EDI) to open-standard IOS (i.e., the Internet). Theoretical work in economics suggests that network effects are a determinant of network adoption, yet the extant literature falls short of empirical testing of the theory. We develop a conceptual model that features network effects, expected benefits, and adoption costs as prominent antecedents. We examine the model on a large dataset of 1,394 firms. The empirical results demonstrate the significant impacts of network effects on open-standard IOS adoption. We find that adoption costs are a significant barrier to open-standard IOS adoption, but EDI users and nonusers treat this very differently: EDI users are much more sensitive to the costs of switching to the new standard. This finding illustrates that experience with older standards may create switching costs and make it difficult to shift to open and potentially better standards, a phenomenon called “excess inertia” in technology change. Further testing the underlying factors that contribute to network effects and adoption costs, we find that trading community influence is a key driver of network effects, while managerial complexity, as opposed to financial costs, is a key determinant of adoption costs. Overall we believe that this study, based on a rigorous empirical analysis of a unique international dataset, provides valuable insights into a set of key factors that influence standards diffusion.

Additional Details

Author Kevin Zhu, Kenneth L. Kraemer, Vijay Gurbaxani, and Sean Xin Xu
Year 2006
Volume 30
Issue SI
Keywords Open standards, standards diffusion, network effects, switching costs, path dependency, interorganizational systems, Internet, electronic data interchange, economics of standards
Page Numbers 515-538