Equilibrium Innovation Ecosystems: The Dark Side of Collaborating with Complementors

The recent years have exhibited a burst in the amount of collaborative activities among firms selling complementary products. This paper aims at providing a rationale 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 firms decides how much to invest in improving the quality of the match with each possible complementor, under the assumption that collaborating with a complementor makes it cheaper to invest in enhancing match quality with such complementor. Once investment choices have taken place, all firms choose prices for their respective components. Our main finding in this setting is that firms end up forming as many collaboration ties as it is possible, although they would all prefer a scenario where collaboration were forbidden, unlike a social planner.