Equilibrium Innovation Ecosystems: The Dark Side of Collaborating with Complementors

We provide a rationale for the recent burst in the amount of collaborative activities among firms selling complementary products, highlighting factors that may result in a lower profitability for such firms overall. To this end, we examine a game-theoretic model in which firms can collaborate with producers of complementary goods to enhance the quality of the systems formed by their components. Collaboration makes it cheaper to enhance such quality, so building innovation ecosystems results in firms investing more than if collaboration were impossible. In markets reaching saturation, firms are trapped in a prisoner's dilemma: the greater investments create more value, but this does not translate into greater value capture because the value created relative to competitors does not change. We also examine the (dis) advantages for a firm of having open or closed interfaces for the component it sells when the environment is competitive as well as how this is related to the endogenous emergence of two-sided platforms.