Essays in internet channel entry and it spillovers

This thesis contains three essays. In the first essay, we study the Internet channel entry game between an existing bricks-and-mortar retailer and a new entrant and analyze how the existing market coverage and their relative entry costs affect the out come of the entry game. We demonstrate that when entry costs are equal, the existing retailer enters the Internet channel first. However, if the market is covered by existing retailers before entry, then because of the threat of Internet channel entry by the potential new entrant, retailer entry cannibalizes existing retail profits—cannibalizing at a loss. In addition, if a potential new entrant has a slight advantage in Internet channel entry costs and the market is not covered by existing retailers, then the new entrant enters the Internet channel first. If the market is covered by existing retailers, then the new entrant must have a larger Internet channel entry cost advantage to be first to enter the Internet channel. In the second and third essays, we model and estimate the information technology (IT) spillovers. Specifically, we examine how one industry's productivity is affected by the IT capital stock of its suppliers and customers. The supplier-driven IT spillovers occur because suppliers' IT investments translate into new or improved products, better customer service and responsiveness, and due to competition in the supplying industry these benefits pass downstream. If the output deflators of supplying industries (consequently the intermediate input deflator of the using industries) do not capture the quality improvement from IT, then the output productivity of the supplying industries is mis-measured or at least mis-assigned. The customer-driven IT spillovers result from more accurate and timely demand information enabled by customers' IT investment. This improved demand information leads to more efficient production and logistics upstream. We develop models to capture the supplier-driven and customer-driven effects based on production theory, and empirically test the models using data on 85 three-digit SIC manufacturing industries and economy-wide input-output tables providing transaction relationships among industries from 1987 to 1999. From the estimation of the supplier-driven IT spillovers we find that for a 10.5% increase in suppliers' IT capital, the suppliers' output increases by 0.63%–0.70%, more than covering the cost of the increase in suppliers' IT capital. In addition, this increase in suppliers' IT capital increases the average downstream industry's output by between $66M and $72M, thereby confirming substantial supplier-driven IT spillovers downstream. From this estimation we can also infer the magnitude of the measurement error of the price deflator of the intermediate input resulting from the failure to account for IT-related quality improvements. We find that the measured price deflator overestimates the true deflator by 29.1%–31.3% at the mean level of IT capital. From the estimation of the customer-driven IT spillovers we find that for a 10.5% increase in customers' IT capital, industry output increases by 0.28%–0.30%, Thus, not only is the increase in IT capital more than covered by increases in output of the industry where the IT investment is made, it also increases the average upstream industry output by between $84M and $90M.