Co-Operative Agreements and the Organization of Industry

Abstract

THE field of industrial organization involves, in major part, the study of how industry is organized and why. The organization of industry, including for example the size distribution of firms, depends in turn on how firms interact. In Markets and Hierarchies, Williamson [11] has identified two major types of interaction: the marketplace (either competition between firms or single transactions between buyers and sellers), and mergers. Earlier, Coase [6] identified the two methods for organizing economic activity as internal to the firm or external to the firm. This paper investigates an intermediate form of interrelationship between firms, which provides yet another way of organizing economic activity, the co-operative agreement. It is important to state just what we mean by co-operative agreements, and to differentiate these type of agreements from other transactions. For our purposes, a co-operative agreement is any long term, explicit agreement amongst two or more firms. This agreement may or may not involve financial remuneration. There can be payment for some good or service: alternatively, the firms may agree to exchange information or other commodity or service: both are co-operative agreements. To meet our definition, the agreement must be long term: a one time purchase of goods and services is not a co-operative agreement, but an agreement to purchase all inputs from one supplier over the next ten years is a co-operative agreement. The agreement must be explicit: just because a majority of all purchases happen ex-post to have been from one supplier does not imply that a co-operative agreement was in force unless there was an explicit understanding before the fact that this would be so. Although the agreement must be explicit, there need not be a written contract for a co-operative agreement to exist. Co-operative agreements can be made verbally, although most agreements are indeed based on a written contract. Finally, a co-operative agreement can take various legal forms: two legal forms that are investigated in this paper are the joint venture and the bidding consortium (which itself may or may not be a joint venture). Since the objective of this paper is to study that transactional middle ground between single transactions in the marketplace and internal organization