When Ignorance Can Be Bliss: Organizational Structure and Coordination in Electronic Retailing

This study examines coordination issues that occur between the marketing department and the information technology (IT) department in electronic retail settings. We consider a marketing department that is responsible for choosing the level of advertising to generate traffic to the firm's website and an IT department that is responsible for choosing IT capacity to provide web visitors a satisfactory experience. The focus here is to examine how duopolistic advertising competition among firms can affect the organizational structure (centralized or decentralized) within each firm. In essence, our interest lies in the question: How does the presence of interfirm competition affect intra-firm coordination (i.e., organizational structure)? As a benchmark, we develop and solve a centralized decision model wherein the levels of advertising and IT capacity are jointly chosen in each firm to maximize profit. This is compared with a decentralized decision model in which the marketing department could potentially advertise suboptimally because its assessment of IT factors (the served traffic rate) is inaccurate. We find that competition can lead to a decentralized equilibrium in which both firms choose not to coordinate among their internal departments. More importantly, we find that when marketing moderately underestimates IT service quality, coordination results in a prisoners' dilemma (PD) equilibrium for each firm whereas decentralization is socially optimal but with an off-equilibrium outcome (resulting in higher profits for each firm). That is, the conventional wisdom that "more coordination is good" could push firms toward a PD equilibrium when they can both be better off by not coordinating internally in the face of competition. This result also implies that if marketing tends to underestimate the capabilities of the IT department, it may be better to encourage such firms to coordinate less rather than encouraging them to coordinate more.