Two electronic hierarchies hypotheses

Andrew McAfee

This paper uses economics literature on the theory of the firm, MIS research, and numerous case examples to argue that in some circumstances information technology (IT) will lead to increased use of hierarchies, rather than markets, as modes for organizing economic activity. This conclusion, which runs counter to the longstanding ₁electronic markets hypothesis,₂ is based on the realization that some categories of computer-mediated interaction require substantial ex ante negotiation, and rely on relationship-specific assets. Haggling and learning, incomplete contracting, and asset specificity become important considerations in these circumstances, and in combination lead to well-documented biases toward hierarchies and away from markets. This paper categorizes computer-mediated interactions and articulates the ex ante agreements required for each, thus indicating where electronic...