Dancing Alone or Dancing Together: Should Firms Compete or Collaborate on New Product Development?

Facing with the challenges from the increasingly complicated competitive environment and diversified product requirements, high-tech firms are increasingly cooperating with their competitors on new product development. Cooperation between competitors can improve technology capability and product quality but also lead to a loss of the competitive edge of the participants. This paper develops an analytic model of the interplay between two competing firms in their new product development strategies and the corresponding investment decisions. Our analysis uncovers several interesting findings. We identify two effects, quality improvement and cost reduction, that determine firms’ investment decisions in the competitive and cooperative scenarios. We show that a firm should increase its investment with the increase of its development capability but save investment if its competitor’s development capability increases. We also find that the competitor’s increasing capability will not necessarily jeopardize a focal firm’s profit. In contrast to previous literature that primarily considers cost reduction as a motivation for firms to cooperate on product development, our research results suggest that technology complementarity between firms and the potential product value difference under competition exert significant influence on each party’s incentives to cooperate. We find that a sufficiently high technology complementarity between firms motivates the firms to cooperate, and the whole industry will be better off with cooperation. At the same time, we show that a relatively small product value difference between firms can make their cooperation incentives more aligned. We also investigate the case with outside options for consumers and find, surprisingly, that competitive threats from outside parties do not necessarily incentivize firms to cooperate on new product development.