Electronic data interchange: competitive externalities and strategic implementation policies

An analysis of the impact of Electronic Data Interchange (EDI) on the competitiveness of upstream suppliers in a simple two-level hierarchical market structure where the buyer faces a linear demand curve and the competing heterogeneous suppliers have an upward-sloping marginal cost function is presented. It will be proven that the adoption of EDI by the supplier can result in the positive externalities for the buyer and negative externalities for the other suppliers. It will also be shown that although EDI reduces the transaction costs of the buyer, the upstream market tends to become more concentrated as a result of the increased cost differentials.