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

32 Pages Posted: 20 Jan 2022

See all articles by Yashuang Wei

Yashuang Wei

Tianjin University

Guofang Nan

Hainan University - School of Management; Tianjin University; Tianjin University - College of Management and Economics

Dahui Li

University of Colorado, Colorado Springs - College of Business; University of Minnesota - Duluth - Labovitz School of Business and Economics (LSBE)

Giri Kumar Tayi

SUNY at Albany - School of Business

Date Written: January 20, 2022

Abstract

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.

Keywords: new product development; competition and cooperation; technology complementarity; investment; outside options

JEL Classification: M11

Suggested Citation

Wei, Yashuang and Nan, Guofang and Li, Dahui and Tayi, Giri Kumar, Dancing Alone or Dancing Together: Should Firms Compete or Collaborate on New Product Development? (January 20, 2022). Available at SSRN: https://ssrn.com/abstract=4013412 or http://dx.doi.org/10.2139/ssrn.4013412

Yashuang Wei

Tianjin University ( email )

92, Weijin Road
Nankai District
Tianjin, Tianjin 300072
China

Guofang Nan (Contact Author)

Hainan University - School of Management ( email )

No 58, Renmin Avenue
Meilan District
Haikou, 570228
China

Tianjin University ( email )

92, Weijin Road
Nankai District
Tianjin, Tianjin 300072
China

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

Dahui Li

University of Colorado, Colorado Springs - College of Business ( email )

1420 Austin Bluffs Parkway
Colorado Springs, CO 80933-7150
United States

University of Minnesota - Duluth - Labovitz School of Business and Economics (LSBE) ( email )

412 Library Drive
Duluth, MN 55812-2496
United States

Giri Kumar Tayi

SUNY at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States
518-442-4947 (Phone)

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