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Influence of Information Technology on Market Structure

As a result, many firms chose to produce rather than buy needed assets (Steinfield, 2000). Steinfield describes such decisions as "hierarchical governance" rather than market mechanisms to coordinate production.

However, the advent of information networks that extended beyond the firm's own boundaries aided it in two divergent ways. First, firms could use information networks to vertically as well as horizontally integrate their production systems, thus binding firms in what were termed "electronic hierarchies" (Steinfield, 2000). Such interfirm relationships allowed for a more efficient outsourcing of important activities without sacrificing control. The second benefit occurred as industries were forced to develop more standardized ways of describing products and supporting electronic transactions due to their interfirm relationships. Now, firms could create electronic markets that essentially performed brokerage functions, thereby efficiently linking buyers and sellers together by reducing their search costs. Examples of such activities include the development of airline reservation systems and real estate multiple listing services (Steinfield, 2000).

Thus, the development of information technology and its application to a firm's organizational structure gave rise to greater vertical integration within firms as well as greater horizontal relationships across firms. Initially, most firm networks were based upon proprietary systems that ran over expensive leased telecommunications circuits. Consequently, firms were required to make highly specific investments to join a network (Steinfield, 2000). And the hardware and software needed to connect to one supplier or customer would not necessarily work across the board.

Thus, such technology costs prevented the free entry and exit of firms to the network, including raising each user's costs of switching to new suppliers once a network was established (Steinfield, 2000). ...

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Influence of Information Technology on Market Structure. (1969, December 31). In Retrieved 18:36, July 21, 2017, from
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