Competitive strategies in digital service capability: Self-Development vs. Cooperation

Abstract

We examine various competition modes arising from the deployment of the digital service capabilities by two competing digital companies in smart product service systems, and analyze the effects of digital service value-addition, the alignment between smart products and digital services on the operations of rival parties. We construct game-theoretic competition models to derive the optimal deployment strategy for digital companies’ digital service capabilities, as well as to determine the optimal digital service level and pricing strategy. According to the sub-game perfect equilibrium outcomes derived from a specific competition mode, our findings uncover that even if a party’s digital service capability is weaker, its digital company still possesses the potential to outperform its rival in terms of profitability. Additionally, an increase in value-addition offered by digital services can undermine digital companies’ profitability. Likewise, the heightened alignment between smart products and digital services can be detrimental to digital companies. Furthermore, our analysis unveils that when the digital service capabilities of both competitors are strong, one of the digital companies will deviate from the symmetrical digital service capability deployment strategy, resulting in an asymmetrical equilibrium in which one company invests internally to develop a digital service capability, while the other partners with an external provider. On the contrary, when the digital service capabilities are weak, both competing digital companies opt to invest internally to deploy the digital service capability. However, this symmetrical equilibrium strategy ultimately places both digital companies in a prisoner’s dilemma.