Equilibrium Innovation Ecosystems: The Dark Side of Collaborating with Complementors

Abstract

The recent years have exhibited a burst in the amount of collaborative activities among rms selling complementary products. This paper aims at providing a ra- tionale for such a large extent of collaboration ties among complementors. To this end, we analyze a game in which the two producers of a certain component have the possibility to form pairwise collaboration ties with each of the two producers of a complementary component. Once ties are formed, each of the four rms de- cides how much to invest in improving the quality of the match with each possible complementor, under the assumption that a rm with a collaboration link with a complementor puts some weight on the complementor s pro t when making invest- ment decisions. Once investment choices have taken place, all rms choose prices for their respective components in a noncooperative manner. In equilibrium, rms end up forming as many collaboration ties as it is possible, although they would all prefer a scenario where collaboration were forbidden. In addition, a social planner would also prefer such a scenario to the one arising in equilibrium. We show that the result that collaboration is ine¢ cient for rms and society does not depend on whether collaboration ties are formed in an exclusive manner: in fact, exclusivity would only worsen the situation.