Firms' collaboration on building a business infrastructure as public goods - dynamics of common versus firm-specific benefits

In this paper, we investigate under what circumstances firms effectively participate in creating an industry-wide infrastructure such as an industry standard without incurring opportunistic behaviours. Literature attests that free riding is unavoidable when companies are involved in offering public goods, which will eventually benefit all the members in the industry regardless of whether they actually contributed to making the goods. That is, the steady state equilibrium stocks of capital (investment) for a Markov perfect Nash equilibrium are lower than those in the collusive case, where the companies act like a single entity, not competitors. We postulate that in addition to the non-discriminating 'industry-wide, i.e. common' benefits, the firm participating in the process can earn another more important type of benefits, firm-specific benefits, which improve the firm's own internal operations and enhances its performance. If it is indeed possible for the firms to realize there exist both common and firm-specific benefits in collaboration and to be able to capitalize on both benefits simultaneously, our analysis shows that opportunistic behaviours can be mitigated or even eliminated, meaning economically better solutions can be derived from both the individual firm's and the entire industry's perspective. Copyright (c) 2005 John Wiley & Sons, Ltd.