Effort exertion and contract design in collaborative product development with fairness concern

Abstract

Purpose This study aims to model collaborative product development (CPD) among a focal firm (FF) and a fairness-concerned external partner (EP). The model is used to explore the impact of fairness concerns on revenue distributing contract and innovation efforts. The study also examines the role of follow-up sales in product development decisions. Design/methodology/approach A sequential game-theoretic model is developed to analyze product development decisions between the two parties, where participants exert innovation efforts to promote the product value and a revenue-sharing contract is used to distribute the revenue. Findings Fairness concern of EP has significant impacts on decisions. FF has incentives to change the contract in that fairness concerns might decrease his profit. Conditions and results change when the contract is endogenously decided. First, FF tends to develop the product independently. Second, FF may share a smaller revenue fraction with EP, as FF relies more on his own efforts during CPD. Third, FF cannot benefit from fairness concerns, as his profit is not higher than that in the benchmark. Finally, the existence of follow-up sales does not change FF’s decision about whether to collaborate with EP. Originality/value This study incorporates fairness preference into CPD decisions. Besides, a new concept of fairness called “effort-related fairness” is proposed.