This research is motivated by the following two research propositions. First proposition is that information technology may have a role in actualizing the effect of strategic supply-line diversification. Second is that the establishment of efficient arms-length inter-firm relationship should be implemented taking into consideration the interactive, feedback relationships among IT level, buyer-supplier relationship, and supply chain dynamics. Through a system dynamics model that incorporates three feedback loops, this paper tests the validity of the above propositions. Three kinds of feedback relationships are derived from prior literature. First is the mutual, positive feedback relationship among IT level, the number of suppliers, and buyer’s bargaining power from the perspective of transaction cost theory. In other words, the continuous deployment of advanced IT ultimately can lead to perfect competition in an electronic market among a firm’s suppliers by reducing transaction costs. As a result, such electronic market structure can enable further deployment of more advanced IT by the buyer. Second is a negative feedback relationship among IT level, the number of suppliers, and buyer’s bargaining power from the perspective of “incomplete contract theory,” which leads to a different and divergent view. Succinctly, the continuous deployment of advanced IT cannot lead to persistent increase in the number of suppliers due to the increased burden for non-contractible investment by the buyer. Consequently, this perspective suggests that the continuous improvement of IT level stemming from declining transaction costs is not possible. Third is a negative feedback relationship among information sharing by advanced IT, product customization level, and supply chain dynamics. Such negative feedback relationship suggests that information sharing by the utilization of advanced IT may not guarantee persistent cost reduction or profit increase throughout the supply chain, and that the effect of information-sharing can be different depending on the detailed characteristics of SCM system including product customization level. The effect of IT investment in supply chain management can be different depending on the interaction among the above three feedback relationships representing IT effect on buyer-supplier relationship and reflecting IT effect on supply chain dynamics. In other words, depending on how the described feedback relationships affect each other or which feedback relationship mostly dominates, the effect of IT investment can be different. From the above argument, we address the following research questions: 1) In studying IT effects on buyer-supplier relationship, which of the theories - Transaction cost theory or incomplete contract theory - is more useful? 2) How does IT effects on supply chain dynamics help resolve the apparent contradiction between transaction cost theory and incomplete contract theory regarding IT’s effect on buyer-supplier relationship? By answering these two research questions, we contribute to a fuller understanding of the role of information technology as a means for actualizing arms-length inter-firm relationship. Simulation results from the SD model runs indicate that continuous deployment of advanced IT can lead to competition among numerous suppliers in the electronic market, and such electronic market structure can enable the buyer to persist in the deployment of advanced IT. That is, the results suggest that there is a mutual positive feedback relationship between IT level and the buyer’s bargaining power, confirming transaction cost theory perspective in these dynamic relationships. This also identifies the validity of the proposition that advanced IT may effectively actualize arms-length inter-firm relationship. Such positive feedback relationship, however, is not derived solely from the relationship between IT level and the bargaining power of the buyer. The model results show that the decrease in the supplier’s inventory level and inventory cost due to more accurate and timely information sharing by advanced IT plays a significant role in the positive feedback relationship between IT level and the buyer’s bargaining power. This implies that supply chain dynamics may have a significant influence on the relationship between IT level and buyer-supplier relationship, thus supporting one of this paper’s key research propositions. The results imply that the buyer-supplier relationship may not necessarily be a zero-sum game. This observation underscores out the importance of a win-win strategy in which both buyer and supplier can co-exist. This paper’s results suggest the possibility of such a win-win SCM strategy. Also, the results of this paper provide that high levels of information sharing between the buyer and the supplier might play a crucial role in effectively utilizing arms-length inter-firm relationship. This brings out the importance of advanced IT deployment for strategic supplier management.