A bane or a boon? impacts of IoT cyber-defense improvement in e-commerce channel

Manufacturers employ platforms’ IoT infrastructure services to produce IoT products and sell them through these platforms. However, consumer data stored within the IoT infrastructure is susceptible to cyber-security risks. Government regulations mandate that platforms invest in IoT cyber-defense improvements, necessitating supply chain collaboration. Motivated by this observation, this study seeks to determine when platforms should enhance IoT cyber-defense levels and assess the impact of such improvements on the e-commerce supply chain under government regulations. We develop a stylized game-theoretic model and conduct a comparative analysis to investigate firms’ equilibrium decisions. Numerical studies are also performed to validate our results. Our findings reveal that setting a higher IoT functionality level benefits manufacturers through enhanced cyber-defense. Additionally, even when the cost of cyber-defense improvement is negligible, platforms may not economically benefit from such improvements if the unit penalty is high and defense efforts are low. Finally, we find that cyber-defense improvements can generate a win-win outcome for manufacturers, platforms, and consumers when defense efforts are high and the cost of improvement is low. Our results suggest that manufacturers should invest more in IoT when cyber-security risks are effectively mitigated. Platforms must carefully weigh the penalty, defense level, and cyber-defense improvement costs in their cyber-security investments. Furthermore, to ensure that cyber-defense improvements benefit social welfare, governments are advised to judiciously set penalties, particularly when defense levels are low.