Competition and Cooperation

When do competitors share assets and other opportunities for mutual gain? Conversely, when do they seem to prefer to distinguish themselves by establishing firm boundaries such that there is a minimum of sharing or cooperation despite potential gains from trade? Why, for example, are two competing auto makers unlikely to sell one another components or to use the same expert advertising agency or law firm but then more likely to equip their cars with identical tires or perhaps to consider the same architect when planning new office buildings? Why do competing law schools in a single city cooperate so little in offering joint programs and economizing on certain costs even as they use the same casebooks in their courses and borrow from one another libraries? This paper suggests circumstances in which competitors exploit economies of scale and the like by trading directly with one another and settings in which third parties, or markets more generally, facilitate cooperation among competitors. As to why and when implicit cooperation through markets is found attractive, the paper suggests that a critical variable may be the ability of markets to ensure that gains from trade are equally divided. Risk averse firms, for instance, may be more inclined to share sources of supply if there is reduced likelihood that cooperation will give competitors relative cost advantages. The paper considers and mildly rejects other explanations for the sometimes inclination to cooperate through markets, including conceptions of firm "pride" and the possibility that cooperation with a competitor will be deemed a negative signal by investors or consumers. It also dwells on the use of noncooperation as a competitive strategy. The discussion ranges across a large variety of examples including (but hardly limited to) nonoverlapping offerings by mail-order retailers, the substantial overlap of stock among competing retailers with fixed locations, the use of common creditors by competitors, the disinclination of competitors to use the same law firms or advertising agencies, cooperation among neighboring municipalities, and the lack of cooperation between competing law schools.