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Title: Collaborating to compete a game-theoretical model and empirical investigation of the effect of profit-sharing arrangement and type of alliance
Authors: Amaldoss, Wilfred
Meyer, Robert J.
Raju, Jagmohan S.
Rapoport, Amnon
Keywords: Same function alliances
Cross-function alliances
Resource commitment
Game theory
New products
Issue Date: Nov-1998
Series/Report no.: Marketing Working Paper Series ; MKTG 98.125
Abstract: In collaborating to compete, firms forge different types of strategic alliances: same function alliances (e.g., R&D alliance), cross-function alliances (e.g., marketing and production alliance), and even parallel development of new products. A major challenge in the management of these alliances is how to control the resource commitment of partners to the collaboration. In this research we examine, both theoretically and empirically, how the type of an alliance and the prescribed profit-sharing arrangement affect the resource commitments of partners. We model the interaction within an alliance as a noncooperative variable-sum game, in which each firm invests part of its resources to increase the utility of a new product offering. Different types of alliances are modeled by varying how the resources committed by partners in an alliance determine the utility of the jointly-developed new product. We then model the inter-alliance competition by nesting two independent intra-alliance games in a super game in which the groups compete for a market. The partners of the winning alliance share the profits in one of the two ways: equally or proportionally to their individual investments. The Nash equilibrium solutions for the resulting games are investigated. In the case of same-function alliances, when the market is large the predicted investment patterns under both profit sharing rules are comparable. Partners developing new products in parallel, unlike the partners in a same function alliance, commit fewer resources to their alliance. However, the profit-sharing arrangement matters in such alliances -- partners commit more resources when profits are shared proportionally rather than equally. We test the predictions of the model in two laboratory experiments in which subjects played the inter-alliance competition game for a monetary payoff contingent on performance. The experimental results provide strong support for the theoretical model. A new analysis of Robertson and Gatignon's (1998) field survey data on the conduct of corporate partners in technology alliances validates our model of same-function alliances.
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