Technological cooperation or competition? optimal strategies of incumbent and entrant in ICT markets

Abstract

This study examines the patterns of technological cooperation or technological competition between an incumbent firm and an entrant firm in Information and Communications Technology (ICT) markets. The incumbent firm in ICT markets often licenses its key technology to a new entrant, who is usually the rival to the incumbent and has the option to enter the market early through licensing in the technology (i.e., technological cooperation), or to delay its entry for producing a higher quality product through in-house R&D (i.e., technological competition). Using a game-theoretical model, we find that technological cooperation is an equilibrium strategy when the technology transfer rate and entrant's R&D capacity are intermediate; while two firms engage in technological competition when the technology transfer rate is high and the entrant's R&D capacity is low, or when the technology transfer rate is low and the entrant's R&D capacity is high. We also find that the high royalty rate and mitigated price competition incentivize technological cooperation, while firms engage in technological competition when the royalty rate is low, or when the royalty rate is high and the price competition is intense. In addition, the incentives for firms to form technological cooperation vary non-monotonically with the length of the entrant's in-house R&D phase, and technological cooperation is reached only when the in-house R&D phase is of medium length. From a social perspective, both fairly high and low technology transfer rates ensure higher social welfare under technological cooperation, which under certain conditions can lead to a win-win-win outcome for the incumbent, entrant, and consumers. Furthermore, technological cooperation is less likely to be an equilibrium strategy when the entrant's market entry timing under in-house R&D is endogenously determined. Our findings can explain the observations of the incumbent and entrant's technological cooperation or competition strategies and provide managerial implications for competing ICT firms and policymakers.