Demand uncertainty, information processing ability, and endogenous firm

Purpose The purpose of this paper is to investigate how information and communication technology (ICT) impacts firm performance, by changing the information processing ability of a firm. Design/methodology/approach It takes the firm as information processing unit to coordinate production in an industry with two‐stage production and demand uncertainty. ICT is assumed to improve the information processing ability. It models that, conditional on the structure of markets described by level of uncertainty, a firm with information processing ability comes into being endogenously from market‐coordinated production, with profit generated. Findings It is argued that the profit of the firm depends on both the structure of markets, and the firm's information processing ability. The improving information processing ability increases firm profitability as long as market‐coordinated production persists elsewhere. However, when the improving information processing ability enables enough firms to compete with no market‐coordinated production left, it decreases profitability of all firms. Finally, case studies on the wholesale and retail industry and the finance and insurance industry of ten OECD countries presents consistent evidence that ICT does not necessarily bring better performance. Originality/value This paper is an innovation based on several streams of literature to model a firm with the consideration of specialization, demand uncertainty, and information processing ability. It thus provides a different perspective on how ICT contributes to firm performance. It theoretically and empirically shows that such contributions are conditional on market structure of a certain industry.