Alliance formation under higher order uncertainty: Embeddedness, fear, and gradualism

Companies face higher order uncertainty when they decide whether to form strategic alliances. We develop a model to examine the key role played by higher order uncertainty in affecting strategic calculation with respect to alliance formation. Our analysis shows that fear of opportunism could prevent the formation of a mutually beneficial alliance even when companies believe they cannot be better off behaving opportunistically (a situation different from the prisoner's dilemma). This coordination problem worsens as the potential loss from relationship opportunism increases. However, it can significantly ease when companies form common approximate beliefs, as often happens when they are familiar with each other.