Selling to Competitors? Competitive Implications of User-Manufacturer Integration

Abstract

Firms that develop user innovations for their own use often find these innovations attractive to their competitors. Thus, the user innovator may consider vertical diversification, turning to manufacturing and selling its own innovation while keeping its original business as a user. The question of whether to become a supplier to competitors obviously is a critical one, as it can have detrimental effects on the competitive advantage of the innovator’s user unit. In this paper, we analyze this decision using two qualitative case studies and a game-theoretical model. We find that the user innovator’s decision to diversity depends on the intensity of competition in the user industry, the value that the innovation would create for other users, and the cost of imitation that other manufacturers would have to bear. It turns out, among other things, that commercialization may be the innovator’s best course of action even if it reduces its overall profits, since it may pre-empt market entry through imitation.