Vertical cooperation stability in R&D programs: A game theory analysis of the semiconductor industry

Abstract

This paper explores the formation mechanisms and stability of vertical cooperation in research and development (R&D) programs between upstream and downstream firms under technological and market uncertainty. Specifically, we concentrate on the dynamics of the semiconductor industry, which is characterized by accelerating technological improvements and an increasingly complex end market. Grounded in game theory, we propose a two-stage model and compare cooperative and noncooperative equilibria. Then, we illustrate the results by referring to a case study of successful vertical cooperation between Google and NXP Semiconductors. We highlight the contribution of vertical cooperation to the success of R&D programs, measured by the probabilities of technological improvement and market acceptance as well as the gross profits of both firms. Meanwhile, to ensure the stability of such an agreement, even in the case of initial collaboration, we advocate the introduction of a cross-cost-sharing mechanism. Finally, we conclude with the strategic implications of maintaining the stability of vertical cooperation in R&D programs in high-tech industries.