Vendors' incentives to invest in software quality in enterprise systems

Abstract

In the enterprise system market, software quality is often unobservable at the contracting stage between the vendor and the customer. Two factors complicate the vendor's decision to invest in software quality. First, as a required part of the transaction, services such as installation and maintenance are bundled with the product. Second, the vendor's cost of delivering these services is directly affected by quality of the software. Incorporating these factors, we develop an analytical framework to examine when vendors of enterprise systems have an incentive to invest in software quality under different market structures and market participant behaviors. We also investigate economic consequences of such quality decisions by enterprise software vendors, highlighting certain unique characteristics of these markets. We consider a duopoly setting, with simultaneous and sequential moves of the vendors. Our results show that in the duopoly market, even when customers are uninformed about quality, an investment-equilibrium exists. We find that there exist conditions under which customers might have reasons to trust that vendors would invest in high software quality.