Endogenous sunk-cost investments are optional fixed investment or capita, that a firm canchoose to impact either upon its price-cost margin or its market share for capturing larger marketspoils. Oft-cited examples are investments in vertical product (quality) differentiation, advertisingoutlays, and R D type expenses for improving production processes. The importance of sunk-costcapital has been highlighted in the recent literature since these investments significantly influencethe degree of competition in an industry mainly through forestalling entry and thereby limitingfuture competition in the industry. Sunk-cost investments play an important role in the debateon the competition-(in)stability perspectives for the banking industry. This paper is motivatedby an important distinction, hitherto unrecognized, that some endogenous sunk-cost investmentsimpact on the relative efficiencies of firms and thereby on its market spoils or profits, while otherswill only impact on its market share and thereby on profits. An example of this distinction is asfollows: while quality improvement in a product or production processes will create efficienciesand, therefore, additional profits, while advertising expenses are used to snatch market shares fromrivals. The unintended consequence of the first type of endogenous-sunk cost investment is to boostefficiencies and thereby shape the nature of competition in a market. The second type will have littleeffect on efficiencies. In this paper, by exploiting the above distinction and using a dataset createdfrom the annual reports of nine major Islamic banks in Jordon during 1993–2010, we will apply theefficiency models and the autoregressive distributed lag (ARDL) methodology to test if informationtechnology (IT) capital is strategically used by Islamic banks as an endogenous sunk-cost investmentto boost their relative efficiencies. For the first time—to the best of our knowledge—we find that ITcapital is strategically used by seven out of the nine Islamic banks. We then consider the implicationof the strategic use of IT capital by Islamic banks for the nature of competition in the Islamic bankindustry of Jordon. By so doing, we also argue that IT capital, through its effects on the nature ofcompetition, will lend stability to the Islamic banking industry of Jordan.
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