New technologies, old organizational forms?

Andrew McAfee

This paper argues that in many industries IT adoption will lead to increased use of hierarchies instead of markets for coordinating economic activity. This contradiction of the 'electronic markets hypothesis' stems from a focus on process-enabling information technologies (PEITs). PEITs are competitively valuable in many industries, and are more easily deployed within hierarchical organizational structures. This is because Hierarchies have access to selective intervention by senior managers, while markets generally do not, and because the asset specificity and impossibility of complete contracting with PEIT make it optimal to place these technologies under common control. This paper defines PEIT, discusses its salient characteristics, and uses economics literature on the theory of the firm to support an 'electronic hierarchies hypothesis.'