"Oligopolistic competition, IT use for product differentiation and the productivity paradox "JEL codes: L13; O14; O47
Abstract: Empirical studies suggest that the huge investment in information technologies (IT) of the past two decades has let to no significant increase in productivity; this phenomenon is known as the "productivity paradox". It has been argued that the paradox might result from oligopolistic competition: because of strategic interaction, each individual firm might find it profitable to invest in cost-reducing IT, but total investment might then be excessive from the industry's point of view. I confirm this view and strengthens it by allowing IT investment to be also devoted to product differentiation which makes the productivity paradox more likely. The emergence of Web-based electronic commerce provides an illustration of the forces identified in the model.