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

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.