Equilibrium Innovation Ecosystems: The Dark Side of Collaborating with Complementors

The recent years have exhibited a burst in the amount of collaborative activities among …rms selling complementary products. This paper aims at providing a rationale for such a large extent of collaboration ties among complementors. To this end, we analyze a game in which the two producers of a certain component have the possibility to form pairwise collaboration ties with each of the two producers of a complementary component. Once ties are formed, each of the four …rms decides how much to invest in improving the quality of the match with each possible complementor, under the assumption that a …rm with a collaboration link with a complementor puts some weight on the complementor’s pro…t when making investment decisions. Once investment choices have taken place, all …rms choose prices for their respective components in a noncooperative manner. In equilibrium, …rms end up forming as many collaboration ties as it is possible, although they would all prefer a scenario where collaboration were forbidden. In addition, a social planner would also prefer such a scenario to the one arising in equilibrium. We show that the result that collaboration is ine¢ cient for …rms and society does not depend on whether collaboration ties are formed in an exclusive manner: in fact, exclusivity would only worsen the situation.