A competitive analysis of information security investment: The role of hacker attacks

The role of hacker attacks on information security investment and firm profits is fundamental in information security economics, which, however, has not been fully examined yet. This paper builds a duopolistic horizontal differentiation model to study this issue and yields a series of interesting findings. First, we find that each firm may benefit from an increase of the probability of hacker attacks when it gains more from security differentiation and suffers less from investment competition. Second, when market competition becomes fiercer, each firm invests less in information security to maintain security differentiation. Third, each firm may benefit from an increase of consumer security loss because the resulting security investment can lead to a more desirable security differentiation. Finally, an increase of cost coefficient of security investment may be profitable to each firm in spite of an increase of security expenditure. This is because an increase of cost coefficient may facilitate security differentiation through discouraging security investment. Additionally, the model is extended to analytically and numerically check the robustness of the main results.