The complexity and speed of developing new products is resulting in the formation of alliances amongst rival firms, thereby sharing the risk of product development by pooling resources and capabilities. At the alliance formation stage, the partnering firms do not have exact knowledge about the other firm’s capabilities. We analyze the stability of collaboration between two alliance firms as a non-cooperative game with information asymmetry. The study determines the optimal investment by firms when faced with private capabilities and product development uncertainty. Our study also contributes to the theory of coopetition in the formation and management of alliances.
In this research, we model a two-stage game of incomplete information where two risk-neutral firms form an alliance. The results of the study constitute a perfect Bayes’ equilibrium and characterize the equilibrium conditions for the stability of the alliance. Managerial implications of the results are also provided in the study. In our model, we focus on the capital invested in the alliance, which, unlike effort, is easily verifiable and measurable without ambiguity.
The results indicate that the success of the alliance and eventual consumer benefits are hinged on the initial investments made by the participating firms. The model captures the strategic action of staying or quitting the alliance in the event of successful product development. The results of the study determine the optimal strategy of the firms to stay or exit the alliance.
The problem environment of alliance formation in the extant literature assumes that the partnering firms have complete information about the costs, innovation sharing and incentives for the firms. One of the main theoretical contributions of our study is to model the strategic interaction of two alliance partners collaborating with investment and sharing capabilities with private information. We also describe the stability of the equilibrium of the alliance post successful product development.
