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...