Innovation Incentives in Enterprise Networks: A Game Theoretic Approach

This paper explores the applicability of game theory to the modelling of enterprise networks. Although these networks have traditionally been studied by the qualitative methods of industrial management, the utilisation of game theory seems to provide new tools and solution concepts for studying them. The paper reviews earlier game theoretic studies on inter-firm cooperation and presents a general stepwise pattern for game theoretic modelling of network economy. In addition, the paper constructs a game theoretic model for studying possibilities for creating innovative incentives in an enterprise network. Inter-firm cooperation is characterised by the interaction of several decision-makers where, on the one hand, the network companies seek joint gains by networking, but, on the other hand, individual companies have their own objectives which may be in partial conflict with those of other companies. Here, game theory provides tools for the formal analysis of situations where multiple decision-makers may have partially conflicting interests, but cooperation between them is allowed. The determination of innovation incentives in enterprise networks is studied through an application of game theoretic modelling. An example from the boat-building industry is presented to illustrate the relevance of innovation incentives in enterprise networks. Specifically, three different equilibrium concepts are applied to determine innovation incentives under different circumstances. The proposed model helps award innovations that improve the efficiency of the network. In addition, the efficiency-improving arrangements can be implemented so that none of the network companies has to suffer. Consequently, the enterprise network becomes innovative and the network companies need not fear their own losses when the efficiency-improving arrangements are implemented. The model also helps share the surplus utility gained through the innovation among the companies of the network.