Voluntary Technology Sharing to Rivals

This study examines a firm’s incentive to share its proprietary technology to help a rival develop a new product. Whereas the rival’s product introduction increases competitive pressure on the firm, it also turns the rival into a multiproduct firm, raising cannibalization concerns that affect its pricing strategy. We find that the rival’s internal cannibalization may soften competition in the existing product market, creating a positive externality for the focal firm and, thus, motivating voluntary technology sharing. We characterize the conditions under which the firm benefits from sharing: generally, the firm is incentivized to share if the new product’s valuation is neither too high nor too low. A high valuation of the new product deters sharing because of excessive competition, whereas a low valuation fails to trigger cannibalization, eliminating the firm’s incentive to share. Our analysis further shows that new product introduction generally enhances social welfare except when the existing product has high valuation and the new product has relatively low valuation. Consumer surplus increases only when the existing product’s valuation is low. These findings offer guidance for policymakers, suggesting when favorable policies should be implemented to promote technology sharing in cases in which social welfare or consumer surplus is not maximized.