Gradual Cooperation between Competitors

Abstract

We study a simple dynamic contribution game between two competitors. During each period, two firms compete on a product market after having made irreversible contributions improving their rival's production cost (e.g., releasing trade secrets). In order to take full advantage of each other's resources, firms should contribute as much as possible from the first period of the game. Yet, they are also tempted to free ride. Thereby gradualism in contributions arises endogenously because it provides an exit option and thus a threat capacity. We obtain closed form firms' voluntary contributions during each period of the game. Lowering their time horizon or raising competition reduces their contributions. Also, the more heterogeneous the firms' contribution capacities are, the slower is the collaboration process, except if they benefit from strong synergies. Finally, the optimal competition intensity is analysed from a social welfare point of view.

Keywords: contribution games, gradualism, irreversibility, cooperation, knowledge transfers, repeated games, competition

JEL Classification: C73, H41, O34