The value of partnership under competition: When competitors may be R&D joint-venture and supply-chain partners for a critical component

Conventional wisdom suggests that firms are worse off when the intensity of competition increases. However, when competitors have the option of cooperating as supply-chain and R& D joint venture (RJV) partners, the findings may be counterintuitive. In this paper, we consider two competing firms that must develop a critical component for their products. They must decide whether to develop a distinct component or to form an RJV with their competitor in order to develop a common component, and how much research effort should be exerted to improve the quality of this component. Forming an RJV partnership reduces R&D investment because both firms are jointly responsible for the research cost, but customers perceive the products to be less differentiated, thus leading to a more intense degree of competition between products. Moreover, one of the manufacturers does not produce this component and must therefore decide whether to outsource the production of this component to its competitor or to a third-party supplier. We examine the following two drivers of competition: (1) competition because the two base products are substitutable and (2) when the two firms form an RJV to develop a common component, the competition between these two products intensifies. Our main results show that both firms are better off when the competitiveness of the industry increases or when forming an RJV intensifies the competition between two products. Moreover, we investigate the robustness of our results to the firms’ bargaining powers by considering a generalized Nash bargaining game where firms negotiate on the RJV partnership decision, and we find that unless the supplier has a very large bargaining power, our results hold.