Strategic joint ventures in Information Technology

Abstract

The Information Technology (IT) industry is seeing a great increase in the number of alliances between firms. It is important for the providers, customers and sometimes even the government to know the implications of such a development. We consider two competing organizations with differentiated products forming a strategic joint venture to offer a new product which will compete with their existing products. (An example would be the joint venture between Apple and IBM to develop a new operating system.) We focus on the ownership structure of the new product and the strategic re-positioning of the old products in terms of their price, with an emphasis on the latter. We show that the prices of the old products will increase after the introduction of the new product and they will not be taken off the market. We also show that our model unifies the salient aspects of the spatial competition and the monopolistic competition approaches of analyzing product differentiation. As a partner's stake in the joint venture increases, its price for the old product shifts further away from the level that will maximize the profit from the old product. However, the overall profit (from the old and new products) increases with the stake in the new product. The resulting feasible set of ownership structures (where both firms are better off by entering the joint venture) shifts towards greater control by the firm with the initial premium product, as the mean reservation price for the new product increases. Initially, the prices of the two products will be set at their respective mean reservation prices (and these will increase after the introduction of the new product). We show the nature of the new prices of the two old products under different scenarios. We show situations where the ordering of the prices of the old products will be maintained, and where it may be changed. The price of the new product will be set at its mean reservation price. When a part of the stake of one of the firms is distributed to a third party, it leads to lower prices for both the products. We discuss generalizations of the model and various areas of potential research.