Eric M. Overby

Process Virtualization Theory and the Impact of Information Technology

In our increasingly virtual society, more and more processes that have traditionally been conducted via physical mechanisms are being conducted virtually. This phenomenon of “process virtualization” is happening in many contexts, including formal education (via distance learning), shopping (via electronic commerce), and friendship development (via social networking sites and virtual worlds). However, some processes are more amenable to virtualization than others. For example, distance learning seems to work better for some educational processes than others, and electronic commerce has worked well for some shopping processes but not for others. These observations motivate the central question posed in this paper: What factors affect the “virtualizability” of a process? This question is becoming increasingly important as advances in information technology create the potential for society to virtualize more and more processes. To provide a general theoretical basis for investigating this question, this paper proposes “process virtualization theory,” which includes four main constructs (sensory requirements, relationship requirements, synchronism requirements, and identification and control requirements) that affect whether a process is amenable or resistant to being conducted virtually. Recognizing that processes can be virtualized with or without the use of information technology, this paper makes explicit the theoretical significance of information technology in process virtualization by discussing the moderating effects of representation, reach, and monitoring capability. This helps explain how advances in information technology are enabling a new generation of virtual processes.

Electronic and Physical Market Channels: A Multiyear Investigation in a Market for Products of Uncertain Quality

Many markets that have traditionally relied on collocation of buyers, sellers, and products have introduced electronic channels. Although these electronic channels may provide benefits to buyers and sellers by lowering the transaction costs of participating in the market, there are trade-offs related to quality uncertainty and increased risk that may limit the adoption of the electronic channels. As a result, buyers and sellers use physical channels for some transactions and electronic channels for others. These usage patterns may evolve over time, particularly when the electronic channels are new. We examine buyer and seller use of electronic and physical channels in a market for products of uncertain quality (used vehicles) over a 2.5-year period. Results indicate that transactions involving low quality uncertainty and relatively rare products occurred in the electronic channels, whereas transactions involving high quality uncertainty and relatively plentiful products occurred in the physical channels. These patterns became clearer over time as buyers and sellers gained experience with the electronic channels. The electronic channels led to discounts for products of high quality uncertainty, but not for those of low quality uncertainty.

Migrating Processes from Physical to Virtual Environments: Process Virtualization Theory

Increasingly, processes that have relied on physical interaction between people, and between people and objects are being migrated to virtual environments in which physical interaction is not available. For example, medical processes that have traditionally relied on physical interaction between physician and patient are conducted virtually through telemedicine, and shopping processes that have traditionally relied on physical interaction between shoppers and products are conducted virtually via electronic commerce. I refer to this migration as process virtualization. Although the pace of process virtualization is accelerating, some processes have proven more suitable for virtualization than others. Process virtualization theory is a recently proposed theory designed to explain this variance. This chapter describes the theory by defining terms, discussing the constructs and relationships of the theory that explain and predict how suitable a process is to being conducted virtually, and discussing how the theory fits into the Information Systems discipline.

Research Commentary---The Design, Use, and Consequences of Virtual Processes

Process virtualization occurs when a process that relies upon physical interaction between people and/or objects is transitioned to a virtual environment. Process virtualization is having profound effects on society, as an increasing number of both business and nonbusiness processes such as those related to education, medicine, and dating are being migrated to virtual environments. There is a vast literature that relates to process virtualization topics, but it is fragmented across different domains. The purpose of this paper is to propose a research agenda to develop high-level theories and frameworks that inform the general process virtualization phenomenon. Developing these theories and frameworks will synthesize existing knowledge and provide a theoretical foundation upon which to add new knowledge as it is created. This will help policy makers maximize the substantial benefits of virtual processes while minimizing the risks. Given the background, interests, and skills of IS scholars, the IS discipline is well suited to lead in this endeavor.

Electronic Commerce, Spatial Arbitrage, and Market Efficiency

Electronic commerce can improve market efficiency by helping buyers and sellers find and transact with each other across geographic distance. We study the effect of two distinct forms of electronic commerce on market efficiency, which we measure via the existence and exploitation of spatial arbitrage opportunities. Spatial arbitrage represents a more precise measure of market efficiency than does price dispersion, which is typically used, because it accounts for the transaction costs of trading across distance and for unobserved product heterogeneity. One of the forms of electronic commerce that we study is a webcast channel that allows electronic access to the traditional physical market, while the other is a standalone electronic market. Both forms provide traders with expanded reach to find and transact with each other across geographic distance, but only one allows traders to conduct transactions immediately, at any time. This variance helps us isolate the effect of these mechanisms (reach and transac...

A Transaction-Level Analysis of Spatial Arbitrage: The Role of Habit, Attention, and Electronic Trading

Despite the central role of arbitrage in finance and economic theory, there is limited evidence of the factors that create and eliminate arbitrage opportunities, how often arbitrage occurs, and how profitable it is. We address these gaps via a transaction-level analysis of spatial arbitrage in the wholesale automotive market. We investigate why arbitrage opportunities are created by analyzing how sellers choose where to sell vehicles. We find that the attention sellers pay to the distribution of a vehicle is negatively related to the probability that it is arbitraged. Arbitrage occurs in approximately 1% of transactions, although electronic trading is making arbitrage less prevalent by improving buyer/seller matching across locations. Arbitrage yields a 5.6% return on average, although arbitrageurs take a loss 14% of the time. Our results contribute to the literature on arbitrage, the effect of attention allocation on market outcomes, and the effect of information technology on market efficiency. This paper was accepted by Brad Barber, Teck Ho, and Terrance Odean, special issue editors.

How Do Adopters Transition Between New and Incumbent Channels

There is substantial knowledge about how individuals and organizations – which we refer to collectively as entities – adopt and use new channels. However, less is known about how this relates to their use of the incumbent channel that the new channel may replace, particularly how this relationship varies across entities and over time. We study this both theoretically and empirically. First, we develop and validate a new typology of how entities’ use of new and incumbent channels evolves over time. Second, we generate novel insights about the post-adoption use behaviors of entities that adopt the new channel at approximately the same time. Third, we analyze how entities’ use of new and incumbent channels varies based on time of entry, which is when an entity first becomes active with either channel. Fourth, we identify and validate other explanatory variables for why entities transition between states of new/incumbent channel use. Our results contribute to theory about the adoption/diffusion of new channels, and they contribute to practice by giving managers tools to understand and predict how entities’ use of new and incumbent channels evolves over time.