Maximizing cooperation in a competitive environment.
Pooling resources and responding to threats are two conventional reasons for establishing cooperative efforts (Axelrod, 1984). While the notions of free markets and unremitting competition pervade U.S. culture and remain embedded in its laws and regulations (Browning, Beyer, and Shetler, 1995), the challenges confronted by organizations suggest a growing need to sustain profitability through cooperation. Hamel and Breen (2007) suggested the following as new challenges for organizations: competitive advantage is eroding more rapidly than ever before; deregulations along with new technology are dramatically reducing the barriers to entry across wide range of industries; de-verticalization, disintermediation and outsourcing are leaving business firms with less and less control over their destinies; digitization is threatening companies in intellectual-based industries; the internet is rapidly shifting bargaining power from producers to consumers; plummeting communication costs and globalization are opening up industries to ultra-low-cost competitors.
Research has shown that, in industries with rapidly changing technologies, proprietary standards create an intense level of competition fueled by the law of increasing returns: the "firstest with the mostest" gets farther and farther ahead (Arthur, 1990). Thus, a paradox arises: to be at the apex of competitive prowess an organization inevitably engages in the pooling of resources in order to respond to threats in the competitive domain, precisely acts characterized by Axelrod (1984) to engender cooperation. To the extent that competition is a de facto force that propels the market and organizations need resources, legitimacy, and efficient transactions from other organizations to effectively compete, the dialectical tensions between competition and cooperation warrants more attention. Indeed, the successful founding and continued viability of Semiconductor Manufacturing Technology (SEMATECH) demonstrate that cooperation between competitors can be achieved under certain conditions (Browning et al., 1995). Thus, the purpose of this paper is to delineate those conditions or governance structures that facilitate cooperation among competitors.
Ring and Van de Ven (1994) argued that a central question for organizational theory is how interorganizational relationships emerge and grow over time and that understanding such relationships requires a focus on sequences of events and interactions among organizational parties. Cooperation and competition has been examined more explicitly in the recent strategic management literature (see Khanna, Gulati, and Nohria, 1998; Browning et al., 1995; Lado, Boyd, and Hanlon, 1997; Dyer and Singh, 1998), and is widely observed in the organizational world. In a good portion of subcontracting relations, for example, coordination through the price mechanism is integrated with elements of cooperation, by means of reciprocal agreements, especially if transactions among these same agents are recurrent and prolonged in time (Dei Ottati, 1994). Since organizations employ technologies to compete under uncertain conditions, it is especially informative to examine the choice between competition and cooperation along the dimensions of technology and uncertainty.
The theoretical lenses of resource dependence theory, institutional theory, and transaction cost theory are leveraged to shed light on the way organizations coordinate to achieve the optimum level of cooperation, or the level that confers more benefits than competition at any point in time. Van de Ven (1976) suggested an optimal level of interdependence for cooperation, since organizations that share too little in common have little incentive to collaborate while those that share too much perceive one another as strong competitors and refuse to work together. Each theory respectively adds to the understanding of how organizations cooperate at different stages in the utilization of technology under varying types of uncertainty.
From the onset, organizations need inputs in order to produce and face uncertainty about the source of such inputs. The resource dependence perspective predicts cooperation with organizations that would supply valuable inputs in the form of human, financial, and technological capital (Pfeffer and Salancik, 1978). In the production stages, organizations transform inputs with proprietary technology, the value of which is determined before it reaches consumers by the uniform adoption of other organizations in the same domain (Garud and Kumaraswamy, 1993). Yet, uncertainty with regard to the dominant technological standard provides the impetus for cooperation only to the extent that uncertainty prohibits competition on technological terms. To understand legitimacy-seeking behavior, institutional theory provides the most revealing account of the conditions under which organizations cooperate to determine the accepted standard. Finally, organizations confront uncertainty with regard to the stability of the technology, or the output. In this sense, consumer demand cannot be gauged ex ante to the extent possible to derive maximum efficiency. The transaction cost lens is employed to show efficiency from cooperating with downstream buyers in order to minimize uncertainty and transaction costs.
RESOURCE DEPENDENCE THEORY
The invisible hand of competition generates economic efficiency through optimal allocation of scarce resources (Smith, 1776/1986). It can be argued that the raison d'etre of organizations is to balance increased differentiation and more sophisticated coordination in order to optimize use of such resources and reduce dependence on other organizations for key resources. Adam Smith emphasized the notion of cooperation: "In civilized society he [man] stands at all times in need of the cooperation and assistance of the great multitudes" (Smith, 1776/1986) and argued that this cooperation was secured by exchange motivated by individual self-interest. Therefore, in contrast with transaction cost thinking that presumes opportunism, or self-interest seeking with guile (Simon, 1947), in economic actors, here the attention to a single organization's needs without regard for other organizations stems from a functional allocative motivation (Arrow, 1974). Moreover, bounded rationality, or behavior that is intendedly rational, but only limitedly so (Simon, 1947), does not play a role in resource dependence thinking. This perspective implicitly assumes that decision makers have adequately identified the sources of environmental uncertainty as well as other organizations that would help to reduce that uncertainty, which is tenable at aggregate levels of analysis, but less likely between specific pairs of organizations (Gulati and Gargiulo, 1999). As such, resource dependence thinking constitutes a positivist perspective on the means by which organizations can mitigate the "external control" of the environment, i.e. other organizations, over them through securing access to key inputs.
According to resource dependence theory, the primary goal of organizations is to maximize power through the acquisition of resources from the environment and reduction of uncertainty (Auster, 1994). So what kind of governance structure will allow organizations to manage their resource dependencies so as to function as smoothly as possible in an open systems schema (Katz and Kahn, 1966)? Since organizations are essentially vehicles by which inputs are transformed with specialized technology and skills into outputs, a key component to organizational survival is thus the inputs. To the extent that resources or key inputs can be procured without relying on upstream suppliers, organizations would prefer not to maintain interorganizational relations inasmuch as such cooperation can constrain their subsequent actions (Zeitz, 1980). However, resource scarcity in the environment dictates that organizations cooperate with the most critical providers of key resources in order to perform any subsequent actions, so that cooperation dominates competition in the pursuit to enhance survival chances (Aiken and Hage, 1968; Molnar, 1978; Paulson, 1976).
Indeed, the alternative paradigm of interdependencies is based on a classical notion that organizations by nature are cooperative systems with harmonious interdependence among subsystems (Barnard, 1938), which superimposed on a system of organizations means that one organization's gain does not necessitate another organization's loss. Rather, cooperation raises the productive capacities of both by increasing the efficient use of resources that results from finer division of labor, and the related development of specialized skills (Smith, 1776/1986). Moreover, resource complementarity occurs when organizations have moderately similar domains, or services, clients, and outputs. Van de Ven and Walker (1984) suggest that at the low extreme of domain similarity, organizations have too little in common to interact, while at the high extreme, the potential for competition and territorial disputes impedes interaction.
Organizations build cooperative ties to access capabilities and resources that are essential to pursue their goals but that are at least in part under the control of other organizations in their environment. Cooperation therefore stems from environmental dependence as measured by resource procurement and uncertainty reduction (Galaskiewicz, 1985). This perspective suggests that organizations voluntarily initiate cooperative ties with upstream suppliers to address specific needs resulting from their external interdependence. Over the past decade, U.S. auto manufacturers have begun to shift their relationships with suppliers and employees in a more cooperative direction. Some supplier firms have been given long-term contracts, and exchange of information and direct supplier participation in the design process are now much more common (Kenworthy, 1996). In this sense, the parceling out of intra-regional learning synergies arising from competition is revealing of the greater competitive prowess afforded thus by localized development of core knowledge. Such strategic networks have been described as relationships between autonomous firms that allow them to be more competitive in comparison to nonaffiliated outsiders (Jarillo, 1988; Sydow, 1991). Oliver (1990) summarized the contingencies- necessity, asymmetry, reciprocity, efficiency, stability, and legitimacy- that induce cooperative ties. Such cooperation involves upstream provision of services- including accountancy, technical, fashion, design and marketing services and advice- and the subcontracting by firms to potential competitors of orders in excess of their own productive capacity (You and Wilkinson, 1994).
The form of governance that allows firms to capitalize on easy access to resources is therefore one that mitigates the uncertainty of input resources through localization of firms in an industrial district. In contrast to the agglomeration of fashionable boutiques on Fifth Avenue in New York or the concentration of sweat shops in Naples who share nothing except the same line of business, industrial districts depend on an optimum combination of competition and cooperation.
For instance, the cooperative aspects of the interfirm relationships help to minimize the disadvantages of small size, while the competitive aspects, along with the specialization, impart the dynamism and flexibility that are often lacking in large, integrated firms (You and Wilkinson, 1994). Alternatively, organizations form joint ventures to manage their interdependencies with the environment, as patterns of joint venture activity reflect patterns of competitive and cooperative interdependence that firms confront (Pfeffer and Nowak, 1976). The formation of joint ventures is more likely to occur for purposes of increasing market power when the potential for erosion of either partner's competitive position is low (Oliver, 1990). Porter and Fuller (1986) noted that joint ventures can dissipate sources of competitive advantage by lowering entry barriers, creating a new competitor, or making an existing competitor more formidable through the transfer of expertise and market access. Hence, cooperation exists to the extent that partners perceive no long-term threats to their competitive advantage, or between organizations and suppliers competing in different domains.
However, the benefits of localization from concentration of production include an increase in the degree and specialization of skills and their diffusion throughout the community so as to create an abundant supply of appropriately qualified labor; the growth of 'subsidiary' trades and specialized services; and an increase in the use of highly specialized machinery made possible by the combined demand of many firms (Marshall, 1947). Indeed, Toyota's cooperation with its suppliers enhances its competitive position in the global automobile industry (Hill, 1995). Since dependencies on these upstream suppliers are often reciprocal and sometimes indirect (Pfeffer and Salancik, 1978), the inherent interdependencies that result from industrial networks necessarily induce a form of cooperation between firms and suppliers to mitigate uncertainty about the source of technological, capital, or human inputs.
Cooperation arises through normative processes (Browning et al., 1995). Rather than leave markets to distribute non-pareto efficient gains to individual entities instead of society as a whole, institutional frameworks can influence the relative prominence of cooperation vs. competition. When the forces of market competition fail to encourage cooperation, some sort of institutional solutions must be elicited to achieve cooperation. The effectiveness of such institutions will determine the extent to which an economy achieves cooperation. Indeed, the more fragmented the business community is (i.e., the less cooperation across industry lines) the less productive its lobbying efforts are likely to be for society. Assuming that the dependence of the organizational field on a single source of support for vital resources generates higher isomorphism, or constraining processes that force one unit in a population to resemble other units that face the same set of environmental conditions (DiMaggio and Powell, 1983), the question becomes which kinds of institutions encourage individuals and organizations to consistently engage in productive economic activity. Cooperation can enhance ties between firms and their investors, and through mimetic isomorphism, or standard responses to uncertainty (DiMaggio and Powell, 1983), organizations that seek reputational benefits from ties will consciously increase cooperation with other organizations.
Modern institutions promotes cooperation by increasing information, lowering transaction costs, spurring efficiency, facilitating specialization and expertise, testing alternative policy choices, and enforcing agreements, all of which encourage reciprocity and enable cooperation over time. In the theory of the core, collusive agreements in an industry are not stable because there always exists alternative allocative deals involving some producers and some consumers which are preferable from the viewpoint of the participants (Arrow, 1974). But if, as Adam Smith once suggested, members of the same trade find it easy to communicate with each other, presumably because of their common experiences, it may well be that the exchange of information leading to a collusive agreement among producers of one commodity is much cheaper than that needed to achieve a blocking coalition. Organizations act autonomously and competitively, yet produce a larger harmony or whole in which output is greater than it would be if one company dominates the others.
Institutional theory suggests that while organizations' ability to cooperate depends on levels of legitimacy achieved, organizations also cooperate to achieve legitimacy and obtain valuable resources from those constituencies that subscribe to this particular sort of legitimacy. Organizations can seek legitimacy by going public, in the sense of Meyer and Rowan (1977), and attract more partners for cooperative ventures. Cooperative institutions can also be encouraged by government policy. In 1984, Congress passed the National Cooperative Research Act, which substantially loosened the restrictions on cooperative research. Since then, joint R&D ventures have proliferated (Kenworthy, 1996). This adheres to the hypothesis of normative isomorphism, which contends that the greater the participation of organizational managers in trade and professional associations, the more likely the organization will be, or will become, like other organizations in its field (DiMaggio and Powell, 1983). This is parallel to the institutional view that the more elaborate the relational networks among organizations and their members, the greater the collective organization of the environment (Meyer and Rowan, 1983). Thus, from a institutional perspective, it is the convergence of relationships rather than the complementary nature of inputs and outputs that drives cooperation.
Technological standards are key facets of this institutional space, representing interface specifications or "rules of engagement" that dictate how different components of technological systems work together to provide utility to users (Garud and Kumaraswamy, 1993). By cooperating to shape an institutional environment, organizational agents directly determine the selection mechanisms that govern their functioning (Gouldner, 1960). Technological fields are embedded in the institutional environments that shape them (Dacin, Ventresca, and Beale, 1999; Garud and Jain, 1996). Firms can derive significant competitive benefits by successfully shaping common standards (Hamel and Prahalad, 1994). This proposition is particularly true of information technology fields characterized by network externalities and increasing returns (Arthur, 1989; Farrell and Saloner, 1986). In such network technological fields, mutualistically interdependent cooperative firms produce individual components of a larger technological system (Barnett, 1990; Garud and Kumaraswamy, 1995a; Langlois and Robertson, 1992). For instance, in the U.S., consortia such as The Microelectronic and Computer Technology Corporation (MCC) and SEMATECH cooperate to capitalize on human, technological, and financial resources and synergies and avoid duplication of effort. The strategic asset-seeking and efficiency enhancing nature of such community-level interorganizational collaboration efforts is intriguing because they transcend typical competitive boundaries in pursuit of collective goals such as gaining market share (Auster, 1994).
Although conformity to expectations of cooperation may confer legitimacy and access to resources in the short run, diffusion of isomorphic behavior may hinder organizational performance and competitive advantage in the long run (Zucker, 1977). That is, institutional taken-for-grantedness and organizational isomorphism in a specific domain decay into a debilitating inertia that turns organizational core competencies into core rigidities and renders the standardization of norms that conferred the initial legitimacy insular. In 1897, Hadley contended that wherever competition is absent, there is a disposition to rest content with old methods, not to say slack ones. To the extent that organizations abstain from competition in deliberating on the next technological standard, captured by normative legitimacy-seeking rationales, uncertainty with respect to the external environment is minimized (DiMaggio and Powell, 1983).
By collectively shaping the institutional environment from which to operate, these organizations then encounter the opportunity to turn public knowledge into private benefit through the cooperation-competition dialectic. As potential benefits from competing against other organizations increase with the collective waiting-out of the dominant design, cooperation falls apart. Advantages accrue to organizations in the consortium, but organizations will continue to compete. Indeed, while cooperation conveys an aura of goodness, how many organizations can be deemed cooperators and for how long? To the extent that profits still drive markets and competition follows profits, ipso facto in a market not all organizations can be cooperators, meaning that some organizations are left out. Cartels embody such phenomenon, essentially limiting free-market competition by voluntary agreement from cooperating organizations.
This form of governance must be considered against the market for its benefits and costs to organizations seeking the optimum balance between cooperation and competition. As an institution for the maintenance of prices or the limitation of outputs of independent organizations, the cartel essentially fosters competition between the "in-group" cooperating organizations and the "out-group" organizations by maximizing the benefits of cartel members at the expense of outsiders (Buckley and Casson, 1988). Institutional theory would draw the boundaries of cooperation around those firms adhering to coercive, normative, and mimetic isomorphism in a particular industry, presumably to minimize uncertainty regarding the next technological standard. The institutional environment includes public policy regimes (Dobbin and Dowd, 1997), regulatory instruments (Van de Ven and Garud, 1989), and mechanisms for venture capital financing (Kenney, 2000). It also includes different sources of legitimacy (Aldrich and Fiol, 1994; Rao, 1994) and underlying norms of community interaction (Karnoe, 1999).
Thus, the norms and system-accepted standards inside a cartel necessarily provide participating organizations with legitimacy and resources to compete with those outside of the cartel. Similar to the organizational goal of rendering other organizations dependent on the focal organization for key resources in the resource dependence perspective, the establishment of its proprietary technology as the dominant standard grants the focal organization legitimacy in the organizational domain, which bolsters its chances of survival in numerous ways (DiMaggio and Powell, 1983). Although in the short term organizations cooperate in a consortium such as SEMATECH to capitalize on the emerging dominant technology (Browning et al., 1995), the nature of uncertainty at the transformation stage of technology differs from the nature of uncertainty at the input or output stages.
That is, organizations may seek relatively similar inputs and deliver substitutable outputs, but the technological processes inside the black box is what differentiates organizations from one another. Therefore, the colluding characteristic of technological consortiums will give way to fragmented lobbying by different cartels for various standards over the long run, as organizations seek to capture rents from the crucial stage of the production process. Indeed, before SEMATECH was founded, firms competed by trying to develop a proprietary standard they could own and use to either collect licensing fees or capture market share from competitors (Browning et al., 1995). Consistent with transaction cost logic, the gradual shift towards employing public knowledge for a focal organization's own establishment of the technological standard constitutes a form of weak cheating, in which opportunism engenders capturing spillover effects for private benefits.
The overarching systems logic to reduce Knightian uncertainty or to compress time in order to uncover the probabilistic distribution of outcomes creates the dynamic of competition among firms. The nature of Knightian uncertainty creates the incentive for competition, as dialectic tensions between proactive improvement of organizational assets and reactive responses to proximal actors generate a balance between constructive inertia and flexible adjustment. As in a poker game, the unknown nature of the outcomes engenders an expectation of differential income distribution and the logic of augmenting organizational assets in seeking market rents. However, if interpreted in the domain of losses, Knightian uncertainty would engender risk-seeking behavior (Kahneman and Tversky, 1979), which is aggravated by assumptions of opportunism in competitors.
The exogenous pressures giving rise to competition necessarily renders organizations more reactive than proactive, which combined with the survival logic and escalating bounded rationality produces mimetic and pre-emptive strikes. Uncertainty encourages the use of cooperation to minimize risk while the threat of opportunism turns the dialectic tension into competition, all of which synthesizes into a need to cooperate with the in-group in order to compete with the out-group. Indeed, the purpose of synthesis is to create "strategic advantages over competitors outside the network" (Lipparini and Lorenzoni, 1994). In terms of governance structures, organizations engage in an action set to mitigate uncertainty with regard to the next dominant technology until enough information asymmetry has granted enough information about the emerging technology that cartels comprise a more profitable way to organize.
However, institutional theory would further contend that if social norms form the basis of institutionalization and if a sufficient majority of people follow these norms (otherwise, it would not be a norm), the threat of retaliation can become a deterrent to non-cooperative behavior. Indeed, the most fundamental of all the social norms is to punish those who do not follow the norms; any social norm would not have warranted its own existence had there been no effective sanctions against transgression (You and Wilkinson, 1994). On average, the payoff to be a norm-follower depends on the importance of the future and the proportion of the interactions norm-followers have with each other compared with the interactions they have with non-followers (Axelrod, 1984). Again, a tradeoff between legitimacy among organizations and private rent seeking is needed to determine the optimum amount of cooperation for an organization, and through the lens of institutional theory this tradeoff engenders a process of learning, as organizations weigh the benefits and costs from adhering to norms against those from deviating.
TRANSACTION COST ECONOMICS
Organizations only have the incentive to economize on transaction costs in the presence of competition, just as they are driven to create resource dependence in other organizations in the presence of scarce resources or motivated by different potential standards to establish the dominant technological standard. The choice of competition or cooperation, and thus the level of coordination achieved, is subject to the constraint that firms will attempt to economize on the transaction costs in the exchange environment. Thus the level of interfirm coordination is hypothesized to be a function of the costs of contracting in the industry environment (Jones and Pustay, 1988). These costs stem from dimensions in the interorganizational network that cause transaction difficulties, including bounded rationality, uncertainty, asset specificity, opportunism, and small numbers (Williamson, 1975). This perspective offers that were there no costs of doing so, firms in an industry would generally find it in their collective self-interest to cooperate with one another and engage in joint-profit maximizing behavior (Scherer, 1980). The counter argument is that firms seek to avoid cooperation to minimize the loss of autonomy (Galaskiewicz, 1985). The pressing question posed by this theoretical lens is which form of governance structure would allow an organization to capitalize on transaction costs?
Market transactions between firms and their suppliers of parts, equipment, and raw materials tend to be discrete and temporary in a pure market (Williamson, 1975). Such relationships impose costs on firms. Continuously searching for the best supplier or customer and bargaining over the terms of agreements can be time-consuming and expensive. Each party is vulnerable to opportunism, because of the lack of relationship development and divided ownership structure. Most importantly, since there is no guarantee of future transactions, each has an incentive to maximize short-run payoffs, which may inhibit communication and discourage long-term investments. Some organizations opt instead for vertical integration, in effect supplanting market mechanisms by using administrative fiat to allocate resources. But this can require a substantial fixed capital investment, promote bureaucratization and aversion to risk-taking, and reduce competition as a driver for efficiency and innovation (Williamson, 1975). An alternative to markets and hierarchies is a long-term partnership with independent buyers. In the absence of compatible long-term partners, increased access to multiple buyers can mitigate the risks of spot contracting.
In this sense, small numbers bargaining no longer pertains as the phenomenon of potentially large numbers of contenders for a particular asset becomes the norm in networks and increasingly globalized business environs. The problem of hold-up, relevant to suppliers that are especially vulnerable to reneging from partnering firms after having invested in asset-specific resources, is mitigated through the availability of a larger set of more knowledgeable next-highest bidders for the resources. The notion of asset specificity, applied to transaction-specific, non-redeployable assets in which physical and human investments are specialized and unique to a task (Williamson, 1975), is obsolescing towards a phenomenon of multiple organizations engaged in communication that the probability of any one firm finding a use for the asset is higher than in the case of disaggregated firms competing in the market. However, Williamson (1975) points out that while a large-numbers condition will frequently appear to obtain at the outset, it may be illusory or may not continue into contract renewal stages. He suggests that if parity among buyers is upset by first-mover advantages, so that winners of original bids subsequently enjoy nontrivial cost advantages over non-winners, the sales relationship that eventually obtains is effectively of the small-numbers variety. Yet this argument assumes that suppliers exhibit maximizing behavior in seeking out the best buyers, which contradicts another tenet of transaction cost thinking, namely, bounded rationality.
When transactions are conducted under conditions of uncertainty or complexity, such as those between organizations when consumer tastes are not fully explicated, in which event it is costly or even impossible to describe the complete decision tree, the bounded rationality constraint is binding and an assessment of alternative organizational modes, in efficiency respects, becomes necessary (Williamson, 1975). The uncertainty about consumer willingness to pay for a technological output, i.e. the product of the organization, stems both from the constantly shifting tastes of consumers as well as the organization's innate inability to take into account all consumers' preferences. But as Simon (1972) indicates, the distinction between deterministic complexity and uncertainty is inessential. What may be referred to as "uncertainty" in chess is "uncertainty introduced into a perfectly certain environment by inability- computational inability- to ascertain the structure of the environment. The key point is that the result of the uncertainty, whatever its source, is the same: approximation must replace exactness in reaching a decision (Simon, 1972). Thus, as long as either uncertainty or complexity is present in requisite degree, as is with consumer demand, the bounded rationality problem arises and an interesting comparative governance choice is often posed.
Building his arguments on the behavioral theory of the firm and institutional economics, Williamson's (1975) transaction cost thinking posits that organizations choose the governance structure that minimizes transaction costs. Although firms are assumed to maximize their own profits on the market, with a large number of buyers firms actually resort to satisficing behavior, whereby organizations treat profit not as a goal to be maximized, but as a constraint (Simon, 1972). Beyond securing a buyer and thus reaching a critical level of profit, organizations thereby attach priority to the attainment of other goals. Assuming satisficing behavior then, organizations even when subject to the opportunism of other organizations and small numbers bargaining situations, seek cooperation with a few key buyers from large numbers bargaining situation. Rather than be concerned with the next best alternative use of an asset, firms can seek solution from the next best alternative user of the asset. In this way, cooperation in a network serves a key function in promoting frequent and dense interactions that propagate information flows to a myriad of potential users. The existence of cooperation depends on the probability and frequency of the exchange relationship to be repeated in the future and the rate at which individuals discount future payoffs. Thus, "the great enforcer of morality (the opposite of opportunism that undermines cooperation) in commerce is the continuing relationship, the belief that one will have to do business again with this customer, or this supplier" (Axelrod, 1984).
Reputation of the focal organization becomes paramount in this setup, since the opportunism previously contributing to passive asset specificity is no longer as relevant as the quality of the asset and reputation of the firm. It has been observed that among the properties of many societies whose economic development is backward is a lack of mutual trust, which equates with poor reputations. Invisible institutions, such as the principles of ethics and morality, are conscious or unconscious agreements that supply mutual benefits for firms that engage in transactions over time (Arrow, 1974). Participants develop reputations as either reliable or unreliable partners, sending signals that either attract or repel possible cooperating entities. The process is iterative--the level of cooperation increases with each agreement among common partners; at the same time, individual participants become more skilled at learning through cooperation (Smith-Doerr and Powell, 1994). Increasing communication to manage the multifarious, complex, constantly changing interdependencies in a modern economy induces cooperation, in much the same way that Adam Smith's "invisible hand" promotes capitalism and Charles Darwin's "natural selection" propels the species.
In fact, asset specificity in competition is advantageous to the survival of the network in creating specialization among the actors. The division of expertise established through development of specific assets increases opportunities for cooperation, as is the case in the biotech industry (Powell, Koput, and Smith-Doerr, 1996), and enhances an organization's competitive position. Arrow (1974) outlines two assumptions for gains from cooperation, that individuals are different with different talents, and that individuals' efficiency in the performance of social tasks usually improves with specialization. He singled out cooperation as a means to achieve specialization of function, involving all the elements of trade and the division of labor:
[T]he blacksmith in the primitive village is not expected to eat horseshoes; he specializes in making horseshoes, the farmer supplies him with grain in exchange, and both (this being the critical point) can be made better off.
Essentially, the degree to which the specific asset is considered useful by the set of other organizations depends on factors within the control of the firm, which further validates the value of cooperation. Whereas institutional theory suggests a competitive solution to cooperation where a large number of perfect substitutes for the assets being exchanged such that those who violate the terms of cooperation can readily be punished and replaced, the tenet of asset specificity in transaction cost logic weakens this competitive discipline, since the possessor of specific assets cannot replace the buyer without incurring losses (You and Wilkinson, 1994). In contrast to the locational and norms proximity expounded in the resource dependence and institutional views, transaction cost economics necessitates expectations proximity with buyers to achieve the kind of cooperation that lowers transaction costs stemming from opportunism and bounded rationality. By investing in hardware that facilitates use of complementary high margin products, an organization creates value for its downstream buyers and in turn creates value for itself. This is exactly what Nintendo's development of reliable, inexpensive hardware did to make games valuable further down the chain for retailers such as Toys R Us (Dei Ottati, 1994).
Cooperation downstream in the network structure transmits information about the functional and reputational value of organizations' outputs, creating a division of message avenues that in turn limits individual organizations' bounded rationality. That a network necessarily induces increased interactions between organizations means that the synergistic opportunities for creating value grows exponentially, as firms pass on more rich information about specific assets in development and potential users of those assets. The network can be interpreted as an organization, with its elaborate methods for communication and joint decision-making, a means of achieving the benefits of collective action in situations in which the price system fails (Arrow, 1974).
There are increasing returns to the use of information. However, an organization's very limited capacity for acquiring and using information is a fixed factor in information processing, and one may expect a sort of diminishing returns to increases in other information resources, akin to a limited span of control in an organization (Arrow, 1974). The value in cooperating derives from disseminating timely information regarding where and how specific assets can be matched with the most willing and capable user. The firm can then invest in the quality of its R&D or the integrity of its employees to reduce endogenous uncertainty, although the stochastic line-up of prospective users of the asset creates Knightian uncertainty, which can only be reduced with the passage of time. In this way, institutional theory captures the waiting-out phenomenon by collectives of organizations that eventually prompts competition while transaction cost economics specifies cooperation with potential buyers as a means to reduce bounded rationality and uncertainty regarding consumer demand. However, if few have invested in this specific asset or potentially dominant technology that to have it is to draw cooperators or buyers, then competition arises due to access pressures.
This paper aims to contribute to the competitiveness literature by showing that mutual gains from collaborative advantage are not only possible in assuming infinite possibilities for creating value, but necessary for long-term organizational survival. Those organizations seeking to maximize their own self-interest in assuming a pie of a fixed size may be selected out in the long- run. Another contribution arises from integrating the behavioral and structural aspects of competition and cooperation among organizations. For instance, legitimacy-seeking behavior and reputational effects affect structural determinants of cooperative behavior, namely governance structures. Research by industrial organization economists has focused on structural characteristics of industries to infer dynamics in organizational interactions (Bain, 1951; Porter, 1980), and institutional economists (Coase, 1937; Commons, 1950; Williamson, 1985) and sociologists (Galaskiewicz, 1985; Oliver, 1990; Powell, 1990) have addressed the structural and governance properties of interorganizational relationships, while Lado et al. (1997) have outlined the behavioral implications of interorganizational dynamics. This synthesis of structural and behavioral logics on competition and cooperation is an attempt at a more complete mapping of organizational action in the domain of mutual gains.
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Relationships among competitors are complex and important. While the present paper has employed three theoretical perspectives to explain the choice in governance structure to maximize cooperation under technological uncertainty, more empirical work is needed in order to describe the dynamics of relationships between competitors. A longitudinal approach would be especially useful in answering Ring and Van de Ven's (1994) call for understanding how interorganizational relationships emerge and grow over time, with a focus on sequences of events and interactions among competitors. Different sizes of organizations may be another dimension that impacts the competition-cooperation calculus, as a firm can handle its relationships with larger competitors in one way, with smaller competitors in another way, and so on. Another valuable avenue of research would be to look at the optimum levels of cooperation vs. competition at different levels of analysis, since the costs and benefits underlying the choice may differ at the firm and systems levels. With increased globalization and emerging nontraditional organizational forms, extensive research is needed to delineate the conditions and governance structures under which cooperation is best suited to organizational success. Finally, both behavioral and structural determinants to cooperative choices for organizations deserve exploration, as such explicate the dynamics of information sharing, trust building, mutual reciprocity, and innovation among organizations that create the cooperation-competition dialectic.
This paper has sought to demonstrate the diversity of perspectives underlying the phenomenon of cooperation among competitors. Organizations can achieve the optimum level of cooperation at a point in time by minimizing different sources of uncertainty at different stages in the use of technology. Specifically, by leveraging the locational network, organizations can minimize uncertainty with respect to input sources. Resource dependence theory predicts the optimum level of cooperation through firms' relations with suppliers. Institutional theory draws attention to the diffused cooperation in consortiums, based on norms and investments in legitimacy, which past a threshold of uncertainty dissipation promotes constructive competition among existing firms and the formation of other new ones. Although cooperative elements contribute in a decisive way to the integration of the system, forces of competition keep it flexible and innovative. Finally, transaction cost logic predicts cooperation with buyers to minimize uncertainty with respect to the traction of the technological output, since immersion in information channels mitigates an organization's bounded rationality and increases the number of potential alternative users of the output, attenuating the small numbers problem. Through cooperation an organization can gain competence, market knowledge, reputation, and other resources of importance for its business and ultimate competitive position. Cooperation with one actor can be explained by the competition with another actor, while shifting dependencies create eroded contracts and new loyalties. Nonetheless, the tenuous targets in the market game do not obscure the need to clasp the invisible hand of competition with the visible hand of cooperation (Williamson, 1985).
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Li Dai is a PhD Candidate in Strategic Management and International Business in the Department of Management at Texas A&M University. She can be reached at firstname.lastname@example.org.
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|Publication:||Advances in Competitiveness Research|
|Date:||Jan 1, 2010|
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