When there are several firms operating within the barriers, all equipped with competitive advantages, opportunities for the exploitation of mutual benefits becomes an important issue for strategy. Elements of competition are still present, certainly, but now there is the possibility of doing better by taking the actions and reactions of others into account.
Adding a viewpoint that stresses cooperation to the existing analysis of direct interactions among agents enables us to highlight things that otherwise might remain unnoticed. First, there are some interactions that are inherently dominated by the possibilities of cooperation. The first priority of software and hardware firms in the data-processing industry is to produce the best systems possible, to which they all contribute. The competition of dividing up the rewards from building those systems is a genuine but nevertheless secondary concern.
In the coming pages we address the two main features of a cooperative strategy analysis—maximizing joint rewards and dividing the gains fairly.
- This is concentrating first on the size of the pie (fully exploiting joint gains) rather than on how it is divided (getting as big a piece as possible). In the language of bargaining, this means seeking at the start to identify win-win possibilities. Only after these have been exhausted is it time to attend to the trade-offs between bargainers. There is an upper boundary to the set of feasible outcomes, that is, the best of all possible worlds currently attainable. This upper limit is defined as the line beyond which there are no joint actions that might expand the overall pie without requiring sacrifices from some of the participants. Things are as good as they are going to get, and they can’t get better without somebody doing worse. Because the full exploitation of these joint gains is the essence of cooperation, we will lay out some of the most important steps firms can take to make their industry as profitable as possible.
Maximizing the attainable joint rewards.
- A stable outcome depends on fairness. If cooperation is to be sustained among a group of economic agents over any extended time, then all the participants have to feel that they are being treated fairly in the division of the rewards. Dissatisfaction, especially when buttressed by a justifiable claim of unfairness, will inevitably lead to a breakdown in cooperation. In fact, individual firms will never enter into a cooperative arrangement in the first place if they feel that the rewards they will garner within the arrangement are not commensurate with the value they contribute. We will examine carefully what constitute “fair” divisions of the pie in different cooperative situations. Companies that have a sound concept of fairness conditions should enter cooperative arrangements with a realistic sense of what they can expect to gain, not so low as to allow themselves to be exploited nor so unreasonable as to be disappointed when their unwarranted aspirations are unfulfilled.
Dividing the gains in rewards according to the principles of “fairness.”
Much can be accomplished if firms simply exercise competitive restraint in areas remote from antitrust laws. For example, firms can improve their profit margins by operating in niches where there are few direct competitors. Everyone is made better off if, instead of going head-to-head in every niche, each firm picks a territory that it has pretty much to itself. Territory can be defined by geography, product type, service specialization, or the characteristics of target customers. So long as these segments are not too closely related, the companies are unlikely to be tempted to compete with one another on price. With each company reigning in its particular niche, the industry will have what is known as effective yield management—in which customers who are willing to pay more for an item will get the opportunity to do so, because their choice resides in a particular niche and they are not tempted to buy a lower-priced alternative in another niche, even if the two purchases look essentially equivalent to someone else. From a cooperative perspective, price coordination is largely a matter of the effective positioning of firms across industry subsegments.
Information should be widely shared, to foster benefits from the spillover value even of research that is tightly focused. Unrestrictive cross-licensing arrangements can broaden the application of research results to the product development efforts of different firms with nonoverlapping specialties.
Before we turn to the principles and their practical strategic implications, it is important to understand what “fairness” means in this context. It is more than a matter of justice. For cooperation to be sustained, all of the cooperating parties need to be satisfied with the returns they receive from continuing to cooperate. If any player becomes sufficiently dissatisfied, it will inevitably abandon its cooperative behavior. Noncooperation from a single player may lead to a cascading collapse in cooperation by others.
Nash used the term “symmetry” to describe a second fairness condition. Under the principles of symmetry, if all the legitimate claimants to the benefits of joint cooperation, that is, all those enjoying competitive advantages and therefore not forced to cooperate by competitive pressure, look essentially the same, then they should divide the benefits of cooperation equally. Like individual rationality, the symmetry condition has to be satisfied in cases where it applies in order for cooperation to be sustained successfully over time. If, among essentially identical cooperating firms, some of them consistently appropriate a disproportionate share of the benefits of cooperation, then the firms that have been shortchanged are going to be dissatisfied, and legitimately so. Firms with authentic grievances will not cooperate indefinitely. The companies that have been successful in grabbing more than their share of the spoils may do well in the short run, but over time their greed will undermine cooperation, to the detriment of everyone.