Dynamics of Industry-wide versus Firm-specific Benefits when Firms Collaborate on Building an Industry Infrastructure

Abstract

Firms often collaborate on building an infrastructure, which benefits all the firms in the industry, although in unequal magnitudes. Then a difficult and tricky issue is concerned with ‘free riding.’ Should there be only ‘common, i.e., industry-wide’ benefits in such collaboration, the literature indicated that the free rider problem is unavoidable. In this paper, however, we suggest that while collaborating, the firm also learns firm-specific knowledge, experience, and know-how, which can be directly utilized for its own internal improvement. That is, the collaboration between firms provides them with not only ‘industry-wide,’ but also ‘firm-specific’ benefits. Our analysis shows that if there indeed exist two types of benefits simultaneously, depending on the balance between the two, the free rider problem can be mitigated or even eliminated.