Essays on information systems and contracting

This dissertation studies two problems centered around information technology and contracting, both ubiquitous features of the modern industrial enterprise. As Porter and Millar (1985) point out, information technology exerts a two-fold strategic influence on firms - IT affects business processes and products. Firms are enhancing the information intensity of their value chains, as well as the information content of their products. The first essay looks at the impact of IT on business processes, modeling how electronic markets affect the procurement activity and vertical scope of firms. The second essay looks at information goods, modeling how a monopolist optimally prices and licenses information goods in an intertemporal setting.; Information technology is permeating business processes, as critical activities of companies are being re-designed to be supported by information technology. An example is the procurement process. Firms that used to buy goods and services from vendors using telephones and faxes, have migrated to Electronic Data Interchange (EDI), and now to XML technologies. The first essay analyzes how IT can affect the procurement process in firms. When electronic markets lower procurement search costs, this essay analyzes the conditions under which the procurement function in firms will be outsourced or insourced, with implications for the vertical scope of the firm. How a principal may optimally delegate search to an agent whose search effort is hidden, is the theoretical focus of the first essay, which explores the interplay of search theory and moral hazard.; Advances in information technology are helping increase the information content of products. Some products such as books and CDs are already available in purely digital form. Other products such as automobiles feature information content such as electronic navigation systems and web access. Pricing goods with a high information content is of increasing interest to researchers and managers. The second essay analyzes situations in which a monopolist pricing and selling information goods over multiple periods could face a commitment problem, and offer excessive upgrades. It then analyzes a specific kind of commitment mechanism used by software firms.