Stochastic game

Microeconomics

Social psychology

Selection (genetic algorithm)

Economics

Computer science

Traveler's dilemma

Business

Superrationality

Prisoner's dilemma

Normal-form game

Iterated function

Psychology

Dilemma

Mathematics

Political science

Structuring

Alliance

Mathematical analysis

Artificial intelligence

Geometry

Sequential game

Game theory

Finance

Organizational Behavior and Human Decision Processes

We model the two-firm alliance as an iterated prisoners' dilemma game with an exit option and test several theoretical predictions over two experimental studies. A new major effect on alliance performance arises by including the exit option (i.e., the option to end the alliance and receive a fixed payoff that is less than the payoff for mutual cooperation but greater than the payoff for mutual defection). The opportunity cost levels of the firms either directly or indirectly influence alliance cooperation and alliance payoffs through affecting the alliance strategies that the firms choose. Implications for partner selection, alliance selection and structuring, and strategy choices along the alliance lifespan, build on these results.

Modeling alliance activity: Opportunity cost effects and manipulations in an iterated prisoner’s dilemma with exit option