Co-Developing Technology Products by Asymmetric Competitors

There are several ways that firms collaborate while also competing. One firm provides a crucial capability or ingredient to another which sells a competing end-market product. For instance, LG sells smartphones and supplies OLED displays for Google’s smartphones. Like it happens here, the ingredient buyer firm (Google, call it A) may co-invest to improve the quality of the shared ingredient (made by B). How do firms gain strategic benefits in such an arrangement? What factors govern the level of investment? Who benefits and who loses? We address these questions in this paper. We note that B’s own investment is motivated more by higher partnership profit than by higher profit in the end-user market, because competition limits the gains from a better product. Indeed, when A has sufficient end-product superiority, B exits the end-user market and becomes more aggressive in improving the quality of the shared capability. A strategic reason for A to co-invest in the shared capability is the desire for a higher performance level than chosen by B (on its own) who self-throttles its own investment because it cannot fully monetize the gains in a competitive market. By doing so, both A and B make higher-quality end-user products and earn higher profits. Still, B gains more because it can extract part of A’s gains through higher ingredient unit price. Crucially, firm A co-invests even though the investment prolongs firm B’s ability to maintain an end-user market presence in direct competition with A. Finally, we demonstrate that B could limit its Stackelberg leadership power to further improve the joint investment in an asymmetric partner relationship which can yield a win-win outcome for both firms