Product differentiation and the choice of alliance partners

Abstract

Given the recent proliferation of the use of alliances as a key business strategy, the nature and extent of alliance formation must now be considered a significant element of any analysis of firm behaviour. This article contributes to this analysis by examining the relationship between a firm's choice of partners for a horizontal strategic alliance and the extent of differentiation among the firm's product and those of its competitors. A non-cooperative, two-stage game is developed and analysed; the results suggest that it is more profitable for a firm to ally with a competitor whose product is more greatly differentiated from its own.