Competitor Collaboration and Product Distinctiveness
40 Pages Posted: 28 Aug 2006 Last revised: 15 Jun 2008
Date Written: August 3, 2007
Competitors often collaborate by sharing a part of their value-creating activities such as technology development, product design, and distribution, which are important elements for creating product distinctiveness across firms. This paper explores the economic consequences of competitor collaborations in the presence of a non-collaborator under the location framework, in which competitors can save on fixed costs by forming a collaboration. Although collaboration between competitors reduces the distinctiveness between their products, it increases the distinctiveness between their products and the non-collaborators' product. At the same time, intensified competition between collaborators lowers their prices and imposes downward pressure on non-collaborator's pricing strategy. The interaction between these two effects, together with the heterogeneity of consumers, yields rich welfare implications. Furthermore, we demonstrate that contrary to standard intuition, partial ownership arrangements could enhance consumers' welfare by inducing competitors to collaborate. Our analysis yields significant and novel welfare implications for competitor collaborations, which have recently attracted substantial attention from antitrust authorities.
Keywords: Antitrust, competitor collaboration, cooperative R&D, location model, oligopoly, partial ownership arrangement, product distinctiveness, strategic alliances, value chain
JEL Classification: D40, L10, L40, M20, M31
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