Co-opetition under Endogenous Bargaining Power

Abstract

Motivated by partial vertical integration practices, this paper investigates how a monopoly allocates a key input between the monopoly and his alliance(s) with complementary partner(s) for the delivery of final product or service. The firms' bargaining powers are endogenously impacted by the monopoly's key input allocation and the monopoly and partner(s) have inherently different cost-efficiencies in supplying complementary input. We show that the endogenous bargaining power delivers a fundamental trade-off between a partner's bargaining power and her cost advantage in the monopoly's input allocation decisions. The monopoly may strategically allocate partial key input internally for his own product/service delivery even when the monopoly's and the alliance(s)' products/services are perfect substitutes and the monopoly has a cost disadvantage. In a single partner setting, the firms' equilibrium input allocations are independent of their complementary input costs. Surprisingly, in a two-partner setting, the monopoly may allocate more key input internally for his own delivery of the final product or service as he becomes less cost-efficient; and symmetric allocation for cost-asymmetric partners and asymmetric allocation for cost-symmetric partners may exist. Our main insights extend to settings with alternative timelines, a general channel profit function, alternative bargaining power functions, and alternative outside options. Our study provides a strategic perspective for the coexistence of both cooperative and competing relationships between the monopoly and the partner(s).