Abstract

Many industries whose products and services are based on information technology are being swept by asset buyouts, mergers and consolidations, a trend that promises to bring increased competition and cooperation, and lower prices for consumers. We have seen this happen in the world of packaged software products, including database management products, CASE tools, LAN software and software suites. The recent news of the merger of IBM and Lotus, and Microsoft's attempted purchase of Intuit are cases in point. In a similar vein, the cellular communications industryalready has experienced a number of consolidations, with the result that the big players have gotten dramatically bigger. The market for services delivered by retail electronic payment networks also has experienced a deal of change in the last decade. Electronic banking networks have been merging with and acquiring one another in their fight for market share. The result is that the average network has increased in size, and although automated teller machine (ATM) usage has expanded even more dramatically,today fewer and fewer electronic banking networks exist (O'Keefe, 1994). Each of these industry scenarios shares an important feature: installed base appears to give rise to network externalities that create value for users who adopt common solutions and buy into shared technological standards. This, in turn, creates value for the acquirers or for the owners of the merged network. Why do some network technologies consolidate with competing technologies or networks to remain competitive, while others evolve to become dominant? How can these outcomes be explained? Although much has been written on the adoption of technologies and networks in the presence of beneficial externalities by economists (e.g., Farrell and Saloner, 1985; Katz and Shapiro, 1985; Oren and Smith, 1981) and IS researchers (e.g., Bakos, 1991; Chismar and Meier, 1992; Clemons and Kleindorfer, 1992; Gurbaxani and Whang, 1991; Seidmann and Wang, 1994), little is known about why network mergers occur under these circumstances. This research examines the determinants ofnetwork default(when a network goes out of business by its own choice) and network consolidationin electronic banking networks, and suggests a general evaluative framework that applies more broadly, to a spectrum of informationtechnologies and competitive interorganization information systems that offer network externalities.

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