Final Report Summary - COOPETITION (Cooperation and competition in vertical relations: the business strategies and industry oversight of supply agreements and buying patterns)
The aim of the research project was to study the interplay between cooperation and competition. Examples of such duality abound. For instance, a firm entertains close cooperation with its suppliers, which however interact also with its direct competitors. Car manufacturers join forces in developing common platforms, and yet compete for customers. Owners of intellectual property reading on a given technology may form a “patent pool” to commercialize a joint license. Airlines compete on some routes and enter into code-sharing agreements on others. The project seeked to understand better the role of such cooperation among competitors and to identify when it should be encouraged or discouraged.
The research has provided some light on these issues in several areas:
- Multilateral “interlocking” relations, where downstream competitors can interact with the same or different suppliers: The analysis analyzes the choice of trading partners in such situation, the impact of exclusive dealing and vertical integration, the choice between alternative business model such as resale or agency, or the role of vertical restraints such as resale price maintenance or most-favoured-nation clauses.
- Procurement dynamics: what is the optimal length of contracts for public and private procurement? Is it better to reward innovators with monetary prizes or by awarding them the contract for implementing the innovation?
- Commercial cooperation: it is generally recognized that such cooperation is socially desirable when goods are complements but undesirable when they are substitutes. However, in practices, goods can be complements for some customers, or for some price levels, and substitutes for other customers, or other price levels; the analysis highlights simple rules, which do not require detailed information about industry specifics, and yet screen out undesirable cooperation while allowing for desirable ones.
- Multiproduct firms: Firms often offer more than one product to the same customers, which may then benefit from “one-stop shop” benefits. For instance, airlines may save on pilot training and certification, as well as on maintenance and spare parts, by procuring the various components of their fleets from the same aircraft manufacturers; likewise, consumers may save on shopping costs by purchasing their weekly grocery needs from the same supermarket. The analysis highlights that in such a situation, competition is desirable for “one-stop shoppers”, whereas cooperation would be desirable for multi-stop shoppers; as a result, firms may adopt cross-subsidization strategies. The analysis also provides a foundation for a new theory of conglomerate mergers.
The research has provided some light on these issues in several areas:
- Multilateral “interlocking” relations, where downstream competitors can interact with the same or different suppliers: The analysis analyzes the choice of trading partners in such situation, the impact of exclusive dealing and vertical integration, the choice between alternative business model such as resale or agency, or the role of vertical restraints such as resale price maintenance or most-favoured-nation clauses.
- Procurement dynamics: what is the optimal length of contracts for public and private procurement? Is it better to reward innovators with monetary prizes or by awarding them the contract for implementing the innovation?
- Commercial cooperation: it is generally recognized that such cooperation is socially desirable when goods are complements but undesirable when they are substitutes. However, in practices, goods can be complements for some customers, or for some price levels, and substitutes for other customers, or other price levels; the analysis highlights simple rules, which do not require detailed information about industry specifics, and yet screen out undesirable cooperation while allowing for desirable ones.
- Multiproduct firms: Firms often offer more than one product to the same customers, which may then benefit from “one-stop shop” benefits. For instance, airlines may save on pilot training and certification, as well as on maintenance and spare parts, by procuring the various components of their fleets from the same aircraft manufacturers; likewise, consumers may save on shopping costs by purchasing their weekly grocery needs from the same supermarket. The analysis highlights that in such a situation, competition is desirable for “one-stop shoppers”, whereas cooperation would be desirable for multi-stop shoppers; as a result, firms may adopt cross-subsidization strategies. The analysis also provides a foundation for a new theory of conglomerate mergers.