Do you want to know a secret? Strategic alliances and competition in product markets

Abstract

Strategic alliances make firms’ boundaries permeable to information leakages that may benefit the competitive position of partnering firms. In this paper, we examine the implications of information leakage on the incentives to join a strategic alliance and the nature of competition in the product market. We show that information leakage can trigger opportunistic behaviours in which firms engage in unprofitable alliances simply because the possibility of learning sensitive information about their competitors increases the expected private rents that firms earn when competing in the product market. Thus, our findings uncover a purely informational mechanism through which information leakage affects the incentives to join a strategic alliance that does not rely on the firm’s ability to absorb spillovers from other firms. We also show that the incentives to devise alliances to gain access to the partner’s sensitive private information may remain even if the negatively affected firm can pursue compensation for the damage that this deceptive business practice may cause.