Operational Collaboration Between Rivals: Strategic and Welfare Implications

Posted: 1 Aug 2020

See all articles by Xin Geng

Xin Geng

University of Miami - Department of Management

Harish Krishnan

University of British Columbia (UBC) - Sauder School of Business

Milind G. Sohoni

Indian School of Business

Date Written: July 5, 2020

Abstract

Business rivals often collaborate on specific aspects of their operations. The collaboration can benefit firms operationally, but may also intensify competition. To better understand and manage this interaction, this paper studies the strategic and welfare implications of a cost-reducing operational collaboration between competing firms. We formulate a duopoly competition model to capture important aspects of the problem, which includes the possible use of facilitating agreements and randomness in cost reduction. Our analysis starts with operational collaboration without any additional agreement beyond the collaborative effort in deterministic cost reduction. While the high-cost firm always benefits from it, the low-cost firm needs to consider the products substitutability and the firms' asymmetry in cost. Moreover, such a pure operational collaboration never hurts consumer surplus. We then consider the effect of centrally decided facilitating agreements. Specifically, with a properly designed unit transfer payment, the competition may be softened so that both firms are willing to collaborate. However, consumer surplus may decrease as a consequence. We further discuss the situation in which the facilitating agreement results from a negotiation process. Finally, we examine the impact of the randomness in cost reduction. We find that, for risk-neutral firms, the uncertainty in the potential cost savings may either increase or decrease the likelihood of collaboration; and the stochastic orders between the two firms' cost reduction may have non-intuitive implications on their willingness to collaborate. Our findings provide useful managerial insights into the underlying drivers of an operational collaboration between rivals.

Keywords: duopoly competition, operational collaboration, transfer payment, consumer surplus

Suggested Citation

Geng, Xin and Krishnan, Harish and Sohoni, Milind G., Operational Collaboration Between Rivals: Strategic and Welfare Implications (July 5, 2020). University of Miami Business School Research Paper No. 3643907, Indian School of Business, Available at SSRN: https://ssrn.com/abstract=3643907

Xin Geng (Contact Author)

University of Miami - Department of Management ( email )

United States

Harish Krishnan

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Milind G. Sohoni

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

HOME PAGE: http://www.isb.edu/faculty/milind_sohoni

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
150
PlumX Metrics