Voluntary Technology Sharing to Rivals

Technology sharing to rivals and new-product introductions enabled by those technologies have often been observed across different industries. We develop a game-theoretic model to examine why a firm would voluntarily share its technology and help its rival develop a new product. We find that the cannibalization consideration in the rival's multiproduct pricing imposes externality to the focal firm, which largely gives rise to its incentive to share technology, in addition to the potential benefit from the change in demand elasticity. Surprisingly, the rival does not always embrace the shared technology. In equilibrium, the new product would be introduced only when the existing product valuation is low but the technology transfer rate is not too low, when the existing product valuation is fairly high but the technology transfer rate is not too high, or when the existing product valuation is high but the technology transfer rate is neither too high nor too low. We show that social welfare increases with the new product introduction to a large extent except when the existing product's valuation is high but the technology transfer rate is low. The new product introduction increases consumer surplus only when the existing product valuation is low. Compared to technology sharing to an independent third party, the focal firm is more likely to share its technology to the rival.