Facoltà di Economia U niversità degli Studi di Parma Cooperation and Competition Among Firms

1

Facoltà di EconomiaUniversità degli Studi di Parma

Cooperation and Competition Among Firms

Ch. 1

Provisional Version

2013-14

OBJECTIVES OF THE COURSE


Cooperative and non-cooperative solutions are central issues in real life as well as in game theory; sometimes it is a basic trade off in exchanges between firms or among individuals.

Sandler 2004:Cooperation “arises when the efforts of two or more individuals are needed to achive an outcome”.


In recent years, a rich literature and wide empirical experience have been accumulated on cooperation and competition among firms.


In recent years, a rich literature and wide empirical experience have been accumulated on cooperation and competition among firms.

The course presents a critical discussion of the essentials. Students will acquire basic knowledge of the main theories of cooperative strategy between firms and single agents and will be able to assess feasibility of individual or collective courses of action.

Questions

• Where is cooperation more efficient than competition?

• What are the costs and benefits of cooperation?

• Do regulation and coordination costs influence cooperative results?

• Do social variables impact on the success of economic cooperation?

• What is the role of sanctioning mechanisms?

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Outline

• Definitions • Forms• Trends• General Evidence • Purposes & Motives• Costs (I): Regulatory Costs• Costs (II): Coordination Costs• Risks• Partner Selection• Procedures & Norms• Social Capital • Trust• Network Contractual Safeguards & Sanctions• Structure & Governance• Impact• Failure & Success• Institutional Role

Teaching Methods

• Lectures, simulations, practical tests and students’ presentations.

Reading Lists

• General Reading List • Special Topics Reading List:• 01 Interfirm Cooperation & Objectives.Benefits

• 02 Interfirm Cooperation & Costs and Failure Risks

• 03 Interfirm Cooperation & Partner Selection

• 04 Interfirm Cooperation & Governance Mechanisms

• 05 Intefirm Cooperation & Social Structure

• 06 Interfirm Cooperation & Performances

• 07 Interfirm Cooperation & Developing Countries

Name/Surname Date Topic Paper

Diemmi Andrea, Mazzotti Silvia, Zucconi Damiano Thu 28.02 . .

Lucibello Deborah, Antolini Paolo Thu 28.02 02 Das & Teng 2000

Golikov Anton, Anastasia Lukina, Lamonica Teresa, Lnica . Fri 01.03 01 Inkpen, 1998

Pecorari Luca, Zoltar Fatima, Pinardi Maria Teresa Fri 01.03 . .

Seritti Giada, Di Pace Stefano Wed 6.03 . .

Pabarotto Helena, Antelmi Celeste Wed 6.03 . .

Evbadazehi Esosa Smilies, De Pascalis Andrea Thu 07.03 07 Sim & Ali

Regnani Pamela, De Pieri Noemi Thu 07.03 . .

D’Onghia Francesco, Coverta Francesco Fri 08.03 02 Das & Teng 2000

Ghellini Elena, Robuschi . Fri 08.03 03 .

Bazzan Silvia, D'Agostino Valentina Wed 13.03 03 Franco&Gussoni 2010

Raffaini, Pietro Wed 13.03 Dacin et al. 1997

Thur 14.03

Thur 14.03

Preziosi ., Marin . Fri 15.03 07 .

Alberghini Claudia, Marques Ribeiro Juliana Fri 15.03 07 Pietrobelli & Rabellotti 2004

Rattaro Ilaria, Baroni Elisa, Viappani Marina Wed 20.03 . .

Raffaini, Pietro Wed 20.03 03 Dacin et al. 1997

Thu 21.03

Thu 21.03

Fri 22.03

Fri 22.03

Sturza Andrea, Draguta Anca, Skenderi Silvana Wed 27.03 . .

Ieva Carlo, Nardella Walter Wed 17.04 07 Ceglie Dini .

Why and How Strategic Alliances Today

Cisco

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Type of interactions between firms

a) Competitive relationships (market forms)

b) Proprietary relationships (acquisitions, groups of firms)

c) Exchange relationships (contractual transactions)

d) Cooperative relationships (L-T agreements, joint ventures, strategic alliances, etc)

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Definition of Strategic Alliance (Yoshino and Rangan, 1995).

• A strategic alliance involves at least two partner firms that:

• remain legally independent after the alliance is formed;

• share benefits and managerial control over the performance of assigned tasks;

• and make continuing contributions in one or more strategic areas, such as technology or products

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Costs & Risks

a. Research indicates that the number of alliances is growing rapidly, at an average rate of 25 percent per year (Parise, S. & Casher, A., 2003).

b. Participation in an alliance may require a firm to reorganize, reduce, or terminate other business relations in order to oblige a new partner’s interests. This post-decision adjustment leads to foreclosures of some future business opportunities and their associated loss of potential benefits and profits (Todeva Knoke 2005)

c. Firms in alliances often try to get ahead of their partners through learning races, which may result in the loss of firm-specific knowledge for some firms (Bleeke and Ernst, 1995; Hamel, 1991; Teng&Das 2008)

d. “The essentially fickle and tentative nature of partner cooperation should not be overlooked” because it renders many strategic alliances “fundamentally self-defeating, unstable, and transitional in nature” (Das&Teng 1998)

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Costs & Riskse) A collaborative agreement may terminate through complete project

dissolution, either before or after achieving its formal objectives; by a joint venture’s acquisition by one of its partners; or through an organizational merger of the parent firms. Researchers have investigated several factors that may affect the survival rates and end states of various types of alliances (Todeva & Knoke 2005).

f) Most analysts found high levels of strategic alliance instability and dissolution, with failure rates approaching 50 percent (Harrigan, 1988b; Kogut, 1988; Dacin et al., 1997).

g) Alliances in the technologically volatile telecommunications industry exhibit an “alarming tendency to fall apart due to fickle behaviour of members” (Curwen, 1999).

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Costs & Risks

h) Bleeke and Ernst (1993) used unpublished reports and interviews with insiders of top companies in the USA, Europe and Japan to determine that, among 49 cross-border alliances, 51 percent were successful for both partners while 33 percent resulted in failure for both. Success meant that the partners achieved their own strategic objectives and recovered their financial capital costs.

i) An event history analysis of 186 joint ventures among US and Japanese electronics firms between 1979-1988 found a 43 percent dissolution rate, with an average life span of less than five years (Park and Ungson, 1997).

j) This overall lack of success is probably due in large measure due to the frequent tensions between competition and co-operation inherent in alliances (Bharat and Tarun, 2004).

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Strategic alliance forms (Todeva & Knoke 2005)

( or “hybrids” combining varying degrees of market interaction and bureaucratic integration (Williamson, 1975).

• (1) Hierarchical relations: through acquisition or merger, one firm takes full control of another’s assets and coordinates actions by the ownership rights mechanism.

• (2) Joint ventures: two or more firms create a jointly owned legal organization that serves a limited purpose for its parents, such as R&D or marketing.

• (3) Equity investments: a majority or minority equity holding by one firm through a direct stock purchase of shares in another firm.

• (4) Cooperatives: a coalition of small enterprises that combine, coordinate, and manage their collective resources.

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• (5) R&D consortia: inter-firm agreements for research and development collaboration, typically formed in fast-changing technological fields.

• (6) Strategic cooperative agreements: contractual business networks based on joint multi-party strategic control, with the partners collaborating over key strategic decisions and sharing responsibilities for performance outcomes.

• (7) Cartels: large corporations collude to constrain competition by cooperatively controlling production and/or prices within a specific industry.

• (8) Franchising: a franchiser grants a franchisee the use of a brand-name identity within a geographic area, but retains control over pricing, marketing, and standardized service norms.

• (9) Licensing: one company grants another the right to use patented technologies or production processes in return for royalties and fees.

Strategic alliance forms (Todeva Knoke 2005)

(or “hybrids” combining varying degrees of market interaction and bureaucratic integration (Williamson, 1975).

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Strategic alliance forms (Todeva Knoke 2005)

(or “hybrids” combining varying degrees of market interaction and bureaucratic integration (Williamson, 1975).

• (10) Subcontractor networks: inter-linked firms where a subcontractor negotiates its suppliers’ long-term prices, production runs, and delivery schedules.

• (11) Industry standards groups: committees that seek the member organizations’ agreements on the adoption of technical standards for manufacturing and trade.

• (12) Action sets: short-lived organizational coalitions whose members coordinate their lobbying efforts to influence public policy making. (GIE in France)

• (13) Market relations: arm’s-length transactions between organizations coordinated only through the price mechanism.

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Motives for organizations to engage in alliance formation

(Agarwal and Ramaswami, 1992; Auster, 1994; Doz and Hamel, 1999; Doz et al.,2000; Harrigan, 1988a; Hennart, 1991; Lorange and Roos, 1993; Zajac, 1990)

a) Market seeking;b) Acquiring means of distribution;c) Gaining access to new technology, and converging

technology;d) Learning and internalization of tacit, collective

and embedded skills;e) Obtaining economies of scale;f) Achieving vertical integration, recreating and

extending supply links

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How to mantain strategic alliances over time?

(Alliances AMA)

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g) Adjust to environmental changes;

h) Diversifying into new businesses;

i) Restructuring, improving performance;

j) Cost sharing, pooling of resources;

k) Developing products, technologies, resources;

l) Risk reduction and risk diversification;

m) Developing technical standards;

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n) Achieving competitive advantage;o) Cooperation of potential rivals, or pre-empting

competitors;p) Complementarity of goods and services to

markets;q) Co-specialization;r) Overcoming legal/regulatory barriers; ands) Legitimisation, bandwagon effect, following

industry trends.

1 Communication between partners

2 Close senior management ties

3 Clearly understood roles

4 Frequent performances feedback

5 Partner selection

6 Clearly defined objectives

7 Senior management commitment

8 Sharing risks and resouces

9 Alignment of culture

10 Integration of information system

11 Relationships building

12 Thorough planning

13 Previous alliance experience

14 Clear payback timelines

15 Day-to-day attention

Ranking of the importance of specific factors for strategic alliances

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Interfirm Cooperation

Empirical Evidence

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Evidence

• Strategic alliances contribute to superior production performance by the parents. Research on 142 Canadian biotechnology startup firms from 1991-1996 found that their initial performances were enhanced by establishing alliance networks that provided access to “diverse information and capabilities with minimum costs of redundancy, conflict, and complexity,” gave more opportunities to learn from established rivals, but avoided risky intra-alliance rivalries (Baum et al., 2000, p. 287).

Evidence

• In particular, the startups’ alliance networks boosted their innovativeness as measured by rates of patenting and R&D growth.

• A comparative study of alliance networks among 138 steel and 130 semiconductor firms from 1990-1994 found that the influence of network characteristics on firm performance varied with industry contexts (Todeva & Knoke 2005)

• In another analysis of semiconductor firms from 1985-1991, Stuart (2000) investigated the impact of alliances on innovation rates and economic growth. He measured innovation as the number of patents granted and growth as annual semiconductor sales.

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Evidence

• Among alliances between firms within same industry, a bigger stock price jump occurred for technical than for marketing agreements, suggesting “that partnering firms from the same industry can better take advantage of technological complementarities” (Chan et al., 1997).

• Multiple recurrent R&D projects among members of an alliance network may create opportunities for collusion by firms that simultaneously compete across multiple product markets (Vonortas, 2000).

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Reading Lists

• General Reading List • Special Topics Reading List:• 01 Interfirm Cooperation & Objectives.Benefits

• 02 Interfirm Cooperation & Costs and Failure Risks

• 03 Interfirm Cooperation & Partner Selection

• 04 Interfirm Cooperation & Governance Mechanisms

• 05 Intefirm Cooperation & Social Structure

• 06 Interfirm Cooperation & Performances

• 07 Interfirm Cooperation & Developing Countries

R&D Partnership (1960-1998)

30Source: Hagedoorn & van Kranenburg 2003

Share (%) of Joint ventures in R&D partnerships (1960-1990)

31Source: Hagedoorn 2002

The share (%) of high-tech, medium-tech and low-tech industries in R&D partnerships (1960-1990)


The share (%) of high tech industries in R&D partnerships (1960-1998)


The share (%) of international R&D agreements in R&D partnerships (1960-1998)


Distribution of R&D partnerships by regions (1960-1998)



Distribution of R&D partnerships by regions (1960-1998)

Top ten firms in pharmaceutical biothcnology (no. of partnerships in different periods)

37Source: Roijakkers & Hagedoorn 2005

R&D Partnerships in Pharmaceutical Biotechnology (1975-79)


39


Source: Roijakkers & Hagedoorn 2005

40





42



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a) Germany

Germany with

1980-84 1985-89 1990-94

UK 9 29 21

France 11 26 21

Neetherland 10 25 16

Italy 5 13 7

Usa 51 108 163

Japan 22 33 41

Tecnological Agreements Between Firms in Most Advanced Countries

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b) UK

UK with

1980-84 1985-89 1990-94

Germany 9 27 18

France 10 31 24

Neetherland 9 27 8

Italy 5 13 8

Japan 117 159 121

Usa 69 139 140

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c) France

France with

1980-84 1985-89 1990-94

Germany 9 24 21

UK 10 31 24

Neetherland 5 24 15

Italy 14 17 14

Japan 23 27 27

Usa 58 69 100

46

Long Term Cooperation with Suppliers (% of the buyer firms)

Industries % of firms

Traditional 70

Scale 73

Specialized 75

Science based 57

Average 72

Source: Arrighetti 2001

On which alliance do you bet? (and why?)

Cisco & Wipro

Ricoh & Heidelberg

https://www.youtube.com/watch?v=lM_Vi7fSS3E

https://www.youtube.com/watch?v=MBqqKj3jFLg

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Consortia by Industries in Italy (2003)

• Agriculture 7,8• Mining/General Buildings 12,8• Manufacturing 8,6• Trade/Retail 14,3• Transport 9,2• Services 3,7• Training, Medical Services 5,8• Utility 10,3• Multi-industry 27,5• TOTAL 100,0

Source: Arrighetti&Lasagni 2004

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Firms that have subscribed agreements or entered consortia by size in 1997 (in %)

Employees % 1-9 4,8 10-19 14,9 20-49 19,8 50-99 25,6 100-249 29,1 >=250 39,3 Total 5,5

Fonte: Istat (2000)

Why and how to build up a ‘global’ partnership?(11.45)

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Cisco

51

Firms that have subscribed agreements or entered consortia by size in 1997 by regions in 1997 (in %)

Regions %

Piemonte 5,2 Valle d’Aosta 5,7 Lombardia 6.0 Liguria 4,7 Trentino-Alto Adige 5,8 Veneto 8,0 Friuli-Venezia Giulia 7,1 Emilia Romagna 7,4 Toscana 5,9 Marche 5,7

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Umbria 5,2 Lazio 5,4 Abruzzo 3,6 Molise 3,9 Campania 3,3 Puglia 4,0 Basilicata 3,6 Calabria 2,6 Sicilia 3,0 Sardegna 5,7

Total 5,5

Source: Istat (2000)

Skills integration actions

Actions In Italy Abroad Total

Recruiting Additional Employees

34 23 57

Entering into Research Agreements with Universities and Research Centers

24 10 34

Developing Deeper Relationships with Existing Suppliers

19 11 30

Developing Agreements with Other Firms

25 22 47

Acquiring Firms that Possess the Required Know-how

17 16 33

Other (Internal R&D; Consulting Services; etc.)

3 3 6

53Fonte:Assolombarda 2011

Difference in the Relative Occurrence (%) of some Organizational Features in Firms with Collaborative Relationships in Comparison

with the Rest of the Business (2000)

Size Pc E-mail Web RD

-10 Emp 12,4 24,1 13,9 13,7

10-19 1,7 11,8 11,6 12,6

20-49 1,4 4,4 4,9 9,8

50-99 1,0 4,1 2,6 16,2

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Difference in the Relative Occurrance (%) of some Organizational Features in Firms with Collaborative Relationships in Comparison

with the Rest of the Business (2000)

Size Product Innov.

Process Innov.

Training

-10 Empl. 17,0 12,1 11,7

10-19 17,6 16,0 9,1

20-49 16,6 13,8 4,9

50-99 13,5 4,8 8,5

55


56

Differences in Relative Employment Trends (1999-2000) in Firms with Collaborative Relationships in Comparison with the Rest of the

Business (2000)

Firms (Total)

- = +

0,5 -6,7 6,2


• Innovation and different forms of creative collaboration

• http://www.ted.com/talks/charles_leadbeater_on_innovation.html

58

Purposes & Reasons for Interfirm Cooperation

59

Source of Returns of Cooperation Among Firms

• Economies of scale (Contractor e Lorange 1988 )

• Risk reduction (Aloysius 1999) • Collusion (van Wegberg 1995) • Transaction costs decrease (Pisano 1990; Narula 1998)

60

• Internalization of technological externalities (Spence 1984, Katz 1986

• Tacit knowledge and resource complementarity (Kogut 1988, Buckley e Casson 1998)

• Market incompleteness

61

Economies of scale

62

Economies of scale: There are economies of scale when production costs decrease as production volumes increase

63

Economies & dis-economies of scale:Increasing returns

C

Q

AC1

64

Economies & dis-economies of scale:Constant returns

C

Q

AC2

65

Economies & dis-economies of scale:Increasing, constant and decreasing returns

C

Q

AC3

66

Economies & dis-economies of scale:Increasing, constant and decreasing returns

C

Q

AC1

AC2

AC3

67

Economies & dis-economies of scale:Total average costs

C

Q

AC1

AC2

AC3

ACtot

68

Economies & dis-economies of scale:

C

QQ2Q1 Q4Q3

69

Economies & dis-economies of scale

C

QQ2Q1 Q4Q3

Increasing Returns

70

Economies and dis-economies of scale:

C

QQ2Q1 Q4Q3

Constant Returns

71

Economies and dis-economies of scale:

C

QQ2Q1 Q4Q3

Decreasing Returns

72

Sources of Economies of Scale

73


• Fixed costs

74


• Fixed costs• Specialization in functional departments

75


• Fixed costs• Specialization in functional departments • Setup costs

76


• Fixed costs• Specialization in functional departments • Setup costs• Law of large numbers and stock costs

77

Sources of Dis-economies of Scale

78


• Transport costs of raw material (Multi-plant Organization)

79



• Retail costs of consumer goods

80



• Retail costs of consumer goods • Supply costs of specialized inputs (i.e. skilled

labor )

81



• Retail costs of consumer goods • Supply costs of specialized inputs (i.e. skilled

labor )

• Costs of hierarchy (internal coordination)

82

Economies of scale and size costraints

Size costraints affect firm efficency in presence of increasing returns.

83

Example

• Firm 1 produces input α α that goes into the final product A. The quantity produced of α (function of final demand A) is q1 and the cost is c1.

84

Economies and dis-economies of scale

C

Q α

AC αtot

Q1

C1

85

The quantity q1 is placed in the descending tract of AC, but demand constraints do not allow choice of quantities to the right side of q1 and thus cost reduction.

86

Alternatives

• Expansion of the demand and growth in size • Arrest of production and resort to the market • Cooperation between firms

87

Economies and dis-economies of scale

C

AC αtot

C

QQ α

88

Economies and dis-economies of scale Hp JV

C

Q1

C1

C

Q

AC αtot

Q α

89


C

QQ1

C1

C

QQ2

AC αtot

90


C

QQ1

C1

C4

QQ2 Q3

AC αtot

91


C

QQ1

C1

C4

Q4Q2 Q3

AC αtot

92


C

QQ1

C1

C4

Q4Q2 Q3 Q5

AC αtot

93


C

QQ1

C1

C4

Q*4Q2 Q3

AC αtot

94

Economies of scale

and cooperation among firms

Setup of common structures (consortia, joint ventures, etc.) to aggregate the demand of the participants and to enhance economies of scale.

95

Economies of scale and cooperation among firms:

expected benefits

• Reduction of average production costs • Guarantee of supply

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Economies of scope

There are economies of scope (variety) when producing jointly two or more goods leads to benefits in terms of productivity or efficiency

Crude Oil Refinery

Crude Oil Refinery

Crude Oil Refinery

Consorzio Parmigiano Reggiano(Production & Marketing)

101

Economies of scope

C(q1,q2) < [C(q1,0) + C(0,q2)]

Subadditive cost function

C(q1,q2) = [C(q1,0) + C(0,q2)]

Additive cost function

C(q1,q2) > [C(q1,0) + C(0,q2)] Superadditive cost function

102

Economies of Scope

Y(q1,q2) < [Y(q1,0) + Y(0,q2)]

Subadditive production function

Y(q1,q2) = [Y(q1,0) + Y(0,q2)]

Additive production function

Y(q1,q2) > [Y(q1,0) + Y(0,q2)] Superadditive production function

103

C(q)

0

q’1

q1

q2

C(q1,0)

Economies of scopeSubadditive cost function

104

C(q)

0

q’1

q1

q2

q’2

C(q1,0) C(0,q2)


105

C(q)

0

q’1

q1

q2

q’2

C(q1,0) C(0,q2)


106

C(q)

0

q’1

q1

q2

q’2

C(q1,0) C(0,q2)


107

C(q)

0

q’1

q1

q2q’2

C(q1,0) C(0,q2)

Economies of scopeSuperadditive cost function

108

C(q)

0

q’1

q1

q2q’2

C(q1,0) C(0,q2)

Economies of scopeAdditive cost function

Example (1)

• For example, Immunex has used its expertise in immunology, particularly in cytokine research, to develop Leukine, a product for oncology. Moreover, levering the knowledge gained from the development of Leukine into the field of rheumatology allowed Immunex to develop its blockbuster drug Enbrel. Both the oncology and the rheumatology subfields involve cytokine research. Thus, Immunex was able to expand its subfields of therapeutic indications based on economies of scope derived from its initial research in cytokine. More recently, Immunex has expanded into the cardiovascular subfield with Nuvance for the treatment of asthma and Novantrone for the treatment of multiple sclerosis, again driven by economies of scope derived from its expertise in immunology.2 Thus, we proxied a startup’s economies of scope through inclusion of a count variable representing the number of biotechnology subfields in which a new entrant firm participates [52].(Rothaermel 2002)

110

Alternatives

• Expansion of the demand and growth in size • Arrest of production and resort to the market (to

sell, not to buy) • Cooperation between firms

Economies of specialization

Definition: Economies of specialization

• The economies of specialization increase firm efficiency (cost savings) by means of extension the division of labor between the firms.

113

Learning effect

C

TAC1

Comparative Advantages

• Trade allows for division of labor between firms

Economies of specialization and cooperative agreements

• Hp.• Greater the economies of specialization, higher the

likelihood of establishing cooperative agreements between firms (joint ventures)


• Firm 1 produces the final good Y in an quantity equal to x1.

• In order to obtain Y firm 1 requires two intermediate inputs (A and B) which produces internally (with costs ACA and ACB).

•Production of intermediate inputs A and B requires coordination costs equal to ACc.


C

Q

ACa

ACb

ACc


x1

C

Q

ACa

ACb

ACc


x1

ACb1

C

Q

ACa1

ACa

ACb

ACc


• As a result of an increase in demand (x1 to 2x1) three alternatives are available:

• Alt I) firm 1 continues to produce internally inputs A and B


x1

ACb1

C

Q

ACa1

ACa

ACb

ACc

ACb2

ACa2

2x1


• Alternative 1 determines a significant increase in the average total costs since:

• (ACa1+ACb1+ACc)<(ACa2+ACb2+ACc)


• Alternative II• Increasing demand is captured by Firm 2 (new

entrant) that produces a cost equal to those of Firm 1.The average total costs of production of x1 are equal to those of 2x1


x1

ACb1

C

Q

ACa1

ACa

ACb

ACc

2x1


• Alternative III

• Firms 1 and 2 create a joint venture (Firm 3; exploiting economies of specialization) producing only input B.

•Firms 1 and 2 acquire input B from Firm 3.

•Firms 1 and 2 stop the production of B.


x1

C

Q

ACa1

ACa

ACb

ACc

ACb3

2x1

Conclusions

• (ACa1+ACb1+ACc)>(ACa1+ACb3+ACc)• (ACa1+ACb1+ACc)-(ACa1+ACb3+ACc) = Es • = Economies of specialization

• In sum:• The emphasis of the division of labor between

firms and the exploitation of economies of scale increase the opportunities for cooperative agreements

128

Risk sharing

129

Risk sharing

Sharing the costs of highly uncertain initiatives between several parties aligns actual profit to expected profit.

130

Example 1

• Consider n research projects. Each project is carried out by a single firm. The cost of each project is identical. The expected payoff is 0.5

In the case ofsuccess: i = 1 with p = 0.5failure: i = 0 with p = 0.5

131

Individual action

=1 or =0

132

Collective Action

=1/n (Σ i,..n)=1/6(3)=0,5

Sic

135

Risk and Cooperation:Advantages

• The actual profit approximates the expected profit: higher is the number of polled projects (n) , higher is the likelihood to equate the expected payoff

Example: Oil industry (drilling projects).

Oil Drilling

Oil Drilling

Oil Drilling

139

Collusion and Cooperation Between

Firms

140

Definition: Collusion

Tacit or explicit agreements between firms aimed to reduce competition and increasing profits.

141

Collusion payoff: Cartel

A) Representative firm

MC

AC

q(Firm)

CP

142


pc

A) Representative firm B) Industry

MC

AC

Q(Industry)

q(Firm)

CP

MC

143


pc


D

MC

AC

Q(Industry)

q(Firm)

CP

MC

144


pc


D

MR

MC

AC

Q(Industry)

q(Firm)

CP

MC

145


pc


D

MR

MC

AC

Q(Industry)

q(Firm)

CP

MC

146


pc


Qc

D

MR

MC

AC

Q(Industry)

q(Firm)

MC

CP

147


pc

qc


Qc

D

MR

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Q(Industry )

q(Firm)

MC

CP

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pm

pc

qc


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q(Firm)

CP

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pm

pc

qc


Qm Qc

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MR

MC

AC

Q(Industry)

q(Firm)

CP

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pm

pc

qc


Qm Qc

D

MR

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AC

Q(Industry)

q(Firm)

CP

MC

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pm

pc

qm qc


Qm Qc

D

MR

MC

AC

Q(Industry)

q(Firm)

CP

MC

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pm

pc

qm qc


Qm Qc

D

MR

MC

AC

Q(Industry)

q(Firm)

CP

MC

153

Collusion and Cooperation Between Firms:Benefits/Effects

• Supernormal profits• Uncertainty reduction• Reduction of competitive pressures • Reducing the costs of competitive strategies• Decreasing consumer surplus

154

Transaction Costs

155

Definition: Transaction Costs

Transaction costs are costs incurred by the parties to build up safeguards to ensure that the benefits expected from the transaction are met.

Transaction Costs

• Costs of:

• Singling out the minimun price in the market

• Negotiating the safeguards

• Writing a contract

Markets & Contracts

• Classical contract law

157

Markets & Contracts


• Perfect information of the agents on the content of the exchange and future contingencies;

•

158

Markets & Contracts



• Reduction to the Present: all future contingencies are foreseen and transferred in the contract;

159

Markets & Contracts




• Discreteness: any exchange is distinct from the preceding and the following one. Agents have not obligations outside the contract;

160

Markets & Contracts




• Discreteness: any exchange is distinct from the preceding and the following one. Agents have not obligations outside the contract;

• Irrelevance of the identity of the parties

161

Markets & Contracts

• Classical contract law• Perfect information of the agents on the content of the

exchange and future contingencies;• Reduction to the Present: all future contingencies are foreseen

and transferred in the contract; • Discreteness: any exchange is distinct from the preceding and

the following one. Agents have not obligations outside the contract;

• Irrelevance of the identity of the parties• The trade agreement is time constrained

162

Markets & Contracts

• Classical contract law• Perfect information of the agents on the content of the exchange

and future contingencies;• Reduction to the Present: all future contingencies are foreseen

and transferred in the contract; • Discreteness: any exchange is distinct from the preceding and

the following one. Agents have not obligations outside the contract;

• Irrelevance of the identity of the parties• The trade agreement is time constrained • Disincentive to the use of third parties (arbitration, courts, etc.)

163

Markets & Contracts

• Neo-classical contract law

164

Markets & Contracts


• Uncertainty (bounded rationality) of the agents about future contingencies;

165

Markets & Contracts



• High cost of reduction to the present;

166

Markets & Contracts




• Partial formalization of the contract;

167

Markets & Contracts





• Identification of mechanism of conflict resolution;

168

Markets & Contracts






• Introduction of a third party (civil court, arbitration).

169

Markets & Contracts






• Introduction of a third party (civil court, arbitation).

• ↓• Relational contract (hierarchy)

170

171

Determinants of Transaction Costs

• Uncertainty (Bounded Rationality)• Opportunism• Assets Specificity

Markets & Contracts

• “Transaction costs increase steeply when contracts are incomplete, that is, when they do not specify fully the actions of each party in every contingency” (Caloghirou et al 2003) .

• Frequent causes of incomplete contracts are:

• 1) small number bargaining usually as a result of high asset specificity (Hart and Holmstrom, 1987; Williamson, 1975).

• 2) exchanges concerning non-tradable assets (i.e. intangible resources: internal knowhow; intellectual capital; organization resources, etc). The most formidable intangible asset is technological knowledge. Such knowledge can be explicit, in the form of a patent or design, or implicit (tacit) in the form of know-how shared among the firm's employees (Caloghirou et al 2003)

173

Alternatives to the use of the market

(1) Acquisition

(2) Collective action among firms

174

Acquisition :Impact

• Decrease of transaction costs• Increase of management and administrative costs

(dis-economies of vertical integration)

175

Comparative Governance Costs (Williamson 1985)

• Comparison of costs of using the market or the hierachy

• k: degree of asset specificity

• Cc: costs of hierarchical coordination

• Ct: transaction costs

G = Cc - Ct Cc > 0; Ct 0

176


Ct

Cc

0k

G

k’

177


Ct

Cc

0k

G

k’

Market Hierarchy (Firm)

178


• Where the degree of asset specificity is low, hierarchy costs are always higher than transaction costs.

• Increasing the degree of assets specificity, hierarchical coordination costs remain constant, while transaction costs increase.

• The intersection of the G with k at point k' denotes the "boundary" of the firm: it is profitable to locate inside the firm a transaction that it was previously efficient to implement through the market.

179


• To complete the analysis we need to compare average cost of internal production and external supply.

C = C(q)c - C(q)s

• C(q)c: cost of production of the input in the integrated firm C

• C(q)s: cost of production of the input in the specialized supplier S

180


Ct

Cc

0k

G

k’


C

181


• With regard to very low degrees of specificity, resort to the market will be more efficient since S, unlike C, can exploit economies of scale producing for different buyers, other than C.

• In the transactional scheme, in the choice “make or buy” concerning commodities or homogeneous goods, it is profitable to make use of the market.

182


• Increasing the specificity of the input, potential economies of specialization are reduced until, for very specific goods, the production costs of an outside producer approximate the production costs of the integrated firm ( C tends asymptotically to 0).

183


• The horizontal sum of C+ G tends to move the firm’s boundary to right

184


Ct

Cc

0k

G

k’


C

G+ C

k*

185


• The segment k *- k ‘ stresses the likelihood of intermediate (hybrid) organization (joint ventures, consortia, etc.).

• Asset specificity is high so resorting to the hierarchy is advisable

• At the same time the possibility of reducing production costs suggests adopting market solutions

186


Ct

Cc

0k

G

k’


C

G+ C

k*

187

“Hybrids”

• Equity joint venture

• Non-equity joint venture


x1

C

Q

ACa1

ACa

ACb

ACc

ACb3

2x1

189

Main features

• Absence of diseconomies of vertical integration

• Commonly shared (not hierarchical) control

• Autonomous mechanisms of regulation and incentive

• Ex ante sharing of the benefits

• Mutual Hostages

190

Cooperation between firms and transaction costs :

Benefits

• Decrease of transaction costs

• Independent development of non-tradable ‘intangible’ resources

• Actual governance of exchanges that cannot be placed

both in the hierarchy and in the market

191

Technological Externalities

Spillovers/Externalities

• Three types of spillovers have been considered by economists (Jaffe, 1996):

• “Pecuniary Spillovers affect embodied technology and occur because R&D-intensive inputs and outputs are not priced at their fully hedonic (quality-adjusted) value, i.e. the producer of a new or improved product or process is not able to set a price that fully captures the incremental benefits flowing to the buyers.


• Knowledge (Tecnological) Spillovers reflect the transfer of knowledge (not necessarily embodied in a product or service) from one agent to another without adequate compensation. Knowledge spillovers are either horizontal or vertical. Horizontal spillovers describe knowledge flows between competitors. Vertical knowledge spillovers describe knowledge flows between firms in different industries.

• .


• Network Spillovers are present when the successful implementation and economic value of a new technology is strongly dependent on other complementary technologies. Generally speaking, network spillovers are present if by undertaking an R&D project a firm creates a positive externality to others interested in complementary projects by raising their expected commercial payoff.

• All three kinds of spillovers are supposed to lead to market failure by adversely affecting the incentives of individual firms to invest in R&D (Caloghirou et al 2003)

• .

195

Knowledge (Tecnological) Spillovers Benefits from innovation

• Innovation and competition• Innovation and appropriability• Technological spillover• Technological externalities

196

Impact of spillovers

• Reduction of incentive to innovate• Reduction of R&D expenditures • Misallocation of R&D resources• Decrease of competiveness of industry/territory

197

Interfirm cooperation

• Interfirm research projects

• Intra-industry research consortia

• Research strategic alliances

• Joint venture

SEMATECH

• SEMATECH History (Sematech website)

• Acceleration: SEMATECH achieves its first mission • SEMATECH's history traces back to 1986, when the idea of launching a bold experiment in industry-

government cooperation was conceived to strengthen the U.S. semiconductor industry. The consortium, called SEMATECH (SEmiconductor MAnufacturing TECHnology), was formed in 1987, when 14 U.S.-based semiconductor manufacturers and the U.S. government came together to solve common manufacturing problems by leveraging resources and sharing risks. Austin, Texas, was chosen as the site, and SEMATECH officially began operations in 1988, focused on improving the industry infrastructure, particularly by working with domestic equipment suppliers to improve their capabilities.

• By 1994, it had become clear that the U.S. semiconductor industry—both device makers and suppliers—had regained strength and market share; at that time, the SEMATECH Board of Directors voted to seek an end to matching federal funding after 1996, reasoning that the industry had returned to health and should no longer receive government support. SEMATECH continued to serve its membership, and the semiconductor industry at large, through advanced technology development in program areas such as lithography, front end processes, and interconnect, and through its interactions with an increasingly global supplier base on manufacturing challenges.

• http://www.sematech.org/• http://www.youtube.com/watch?v=dOwoyVcXVJw

SEMATECH

• Globalization: Adding international membership • • The International 300 mm Initiative (I300I) was formed as a subsidiary of

SEMATECH in 1995, with seven non-U.S. companies and six U.S. companies cooperating on 300 mm tool standards and specifications; in 1998 five of those international companies opted to participate in more of the consortium's programs through a subsidiary called International SEMATECH, and then ultimately made the decision to join SEMATECH as full members. In 2000, SEMATECH completed its first year of operations as a unified global consortium, with members from Asia, Europe, and the U.S., dedicated to cooperative work on semiconductor manufacturing technology.

• Collaboration: Driving innovation and industry consensus• Over the years, SEMATECH’s R&D model has continuously evolved to

incorporate broader industry participation—including equipment and materials suppliers, fabless companies, foundries, and packaging/assembly companies—as well as collaboration with universities, regional governments, and other consortia in order to foster technology innovation and accelerate the commercialization of new materials and nanostructures for future transistors.

SEMATECH

• Main outcomes• We reduce cost and risk• We are a companion to members' R&D processes and help develop aspects of

technology faster and cheaper than members could on their own by reducing options to the most workable solutions. Rather than each member company funding solutions individually, we enable members, using what they learn at SEMATECH, to spend more resources on developing their own competitive advantage.

• We deliver exclusive benefits to our members• First-to-market solutions – Members get full and detailed, actionable data.

• Cost avoidance – Members avoid spending the full R&D costs of ultimately unworkable solutions and lower their learning curve for new processes.

• Inside track – Members receive early evaluation of new materials and technologies without contamination and equipment risk in their fabs.

201

Expected benefits

• Internalization of externalities

• Recovery of the incentive to innovate

• Raising the level of investment

202

Tacit knowledge and resource complementarity

203

Formal and tacit knowledge

• Formal knowledge: based on information that is encoded or publicly available. It is standard knowledge. It is transferable and is independent from the context in which it is used.

204

• Tacit knowledge: Informal, not encrypted or even unencrypted knowledge. It is the result of accumulation of experiences in a specific organizational context. Is 'rooted' within the organization that produced it. It is a non transferable

resource.

Formal and tacit knowledge

Tacit knowledge and intangible resources

• Intangible firm assets are the main source of firm competiveness (Resource-based view).

• According to this approach, firm resources are valuable, rare, non-substitutable, non-tradable and cannot be easily imitated (Penrose 1959) .

• Entity and quality of such a resource is correlated with accumulation (time) and learning (path dependent)

• The existing stock of resources is heterogeneous and immobile


• The resource-based view considers capabilities not as static attributes but, rather as the ability of the firm to adapt to, and gain competitive advantage in a rapidly changing environment. (Teece 1992)

• In order to fully exploit internal resources and to develop sustained competitive advantages, a firm may need access to external complementary resources (Richardson, 1972).


• Inter-firm collaboration -alliances and joint ventures- can be seen as a mode of skill acquisition and skill building. In sum, strategic alliances - and in particular strategic technical alliances - may be a very effective organisational mode for the firm to gain access to resources and upgrade capabilities. (Glaister 1996; Caloghirou et al. 2003).

• In addition interfirm cooperation is an outcome of increasing pressures – such as increasing breadth, tempo and scale of technology, decreasing product life and design time, increasing complexity of product requirements (Caloghirou et al. 2003).

• In this context going-it-alone is not a feasible strategy. Generally speaking, “firms create more alliances in response to the powerful, knowledge-driven forces reshaping their economic environment”. (Badaracco, 1991).

Skills integration actions

Actions In Italy Abroad Total

Recruiting Additional Employees

34 23 57

Entering into Research Agreements with Universities and Research Centers

24 10 34

Developing Deeper Relationships with Existing Suppliers

19 11 30

Developing Agreements with Other Firms

25 22 47

Acquiring Firms that Possess the Required Know-how

17 16 33

Other (Internal R&D; Consulting Services; etc.)

3 3 6

208Fonte:Assolombarda 2011

209

Resource complementarity

There is resource complementarity when:

a) a party cannot complete the project undertaken without the intellectual resources of the other and vice versa, and

b) the resources of at least one partner are not tranferable or may be transferred only incurring in very high cost (tacit knowledge )

210

The individual alternative

• Internal growth

• External growth (acquisitions)

• Abandon the project


• Three types of strategic alliance can be identified (Glaister, 1996):

• a) strategic alliances to gain critical mass in resources, • b) strategic alliances to acquire capabilities through

learning, and • c) strategic alliances to generate new proprietary

capabilities through the convergence of idiosyncratic capabilities from partner firms.

212


• Formal and informal agreements

• Equity and non equity joint ventures

• Consortia

213

Interfirm cooperation and resource complementarity:

Benefits

• Exploitation of tacit knowledge in terms of diversification or extension applications;

• Reduced transaction costs

• No dispersion of skills and knowledge

Firm Incentives to join an research joint venture(Input-related motives )

(detailed in Caloghirou et al. 2003). • Efficiency motives• 1. R&D cost sharing; • 2. Reduction of R&D duplication; • 3. Risk sharing, uncertainty reduction; • 4. Spillover internalisation; • 5. Continuity of R&D effort, access to finance; • Resource base motives • 6. Access of complementary resources and skills; • 7. Research synergies; • 8. Effective deployment of extant resources, further development of resource base; • 9. Strategic flexibility, market access, and the creation of investment “options”; • Competition • 10.Promotion of technical standards; • 11.Market power, co-opting competition; • 12.Legal and political advantages.

Firm Incentives to join an research joint venture(Output-related motives )

(detailed in Aschhoff & Schmidt 2008)

• R&D collaboration with universities increases the growth of sales attributable to market novelties, while cooperation with suppliers and competitors leads to a growth of value added per employee (Belderbos et al. 2004);

• Lööf, and Broström (2008) find that collaboration between universities and firms not only increases the probability that firms will apply for a patent but also has a positive impact on innovative sales per employee.

• Cooperating firms have higher sales attributable to product innovations than do non-cooperating firms (Gemünden and Ritter 1997);

• Cooperating firms perform better in terms of innovative sales than do other firms (König et al. 1994; Felder et al. 1994).

• Klomp and van Leeuwen (2001), for example, find a positive impact of a cooperation dummy variable on the innovation output of firms.

Firm Incentives to join an research joint venture(Output-related motives )

(detailed in Aschhoff & Schmidt 2008)

• R&D cooperation with competitors or with firms from the same sector has a highly significant positive effect on cost reduction. External expertise acquired through cooperation with competitors seems to help firms to improve their production processes significantly (Aschhoff &Schmidt 2008)

• The firms that cooperate with universities or research institutions in their R&D and innovation activities have a higher share of turnover from market novelties than do firms that do not cooperate or those firms that cooperate with customers, suppliers, or competitors. For firms to achieve above-average success with market novelties, it seems particularly important that they combine their own know-how with expertise and knowledge from research institutes and universities (Aschhoff & Schmidt 2008)

Innovative Networks and Partners Diversity

Source: Pittaway et al. 2004

Network and Suppliers

• Integration of suppliers can (Pittaway et al. 2004) :

• help manufacturers identify improvements that are necessary to remain competitive (Lincoln et al. 1998; PerezPerez and Sanchez 2002);

• enable firms to bring to bear wider expertise during the development process (Romijn and Albaladejo 2002; Romijn and Albu 2002);

• help reduce concept-to-customer cycle time, costs and reduce quality problems (Ragatz et al. 1997);

• give incentive to buyer firm to invest more in research and development, because they require an infrastructure in which to frame collaborative behaviour (Perez Perez and Sanchez 2002).



Network and Customers

• Pittaway et al. (2004) :

• dialogue between key business customers and suppliers not only allows firms to learn of existing needs but also lead to the discovery of new needs in advance of the competition (Bruce and Rodgus 1991);

• customers are crucially important at the idea generation stage of the innovation process (Gemünden et al. 1992);

• the innovator learns from the customer the likely market potential of the product idea (Gemünden et al. 1992).

• customer involvement reduces the risks of innovation (Gemünden et al. 1992; Ragatz et al. 1997) ;

• customer involvement tends to be useful at the beginning, in terms of idea generation, but is less so during the developmental process (Biemans 1991; Bruce and Rodgus 1991; Conway 1995; Gemünden et al. 1992).

Network and Institutions • Science Partners (universities, technical colleges, research institutes,

applied science consultancies and independent research and design laboratories):

• play an important role as independent network brokers and intermediaries within business networks (Pittaway et al. 2004);

• help firms to develop thinking that steps outside their particular business system (Liyanage 1995);

• enable different business systems to communicate by generating trust between different parties in their common role as neutral agents (Hausler et al. 1994).

• tend to be most important where the innovation is relatively radical in orientation (Ebadi and Utterback 1984; Fritsch 2001; Verspagen 1999).

Network and Institutions • Venture Capital Firms:

• provide a networking infrastructure for the commercialization of innovation (Florida and Kenney 1988);

• act as key brokers within technology and innovation networks, introducing key partners to prospective and current firms with whom they have invested (Bygrave 1987, 1988).

224

Market incompleteness

225

Definition

A market is incomplete where the consumer, while agreeing to pay a fair price (reflecting the cost of production), does not have access to the required

good or service because of shortage of supply. (Movies today in Parma)

Vertical integration and market size (Stigler)

MS

VI

T

MS,VI

Intro Maturity Decline

Hp

• Market incompleteness allows for huge incentives for cooperation between firms (and between economic agents)

228

A typology

• Coordination goods

• Public Goods

• Non-transferable goods

• Indivisible goods

229

Coordination goods

• High cost of information, planning and monitoring (for example technological standard)

• Presence of multiple equilibria

• Supply shortage • Coordination goods are produced only after

coordination problems are overcome

230

Oligopoly and Product Quality

Assumptions

• Two identical firms

• The quality of the product is closely correlated with the costs of the inputs

• Temporary lag in the consumer perception of quality change

• The consumer cannot identify the producer (commodity)

232


PC

Q

D1

233


PC

Q

D1MR1

234


PC

Q

MC1

AC1

D1MR1

235


PC

Q

MC1

AC1

Q1

D1MR1

236


PC

Q

MC1

AC1

P1

Q1

D1MR1

237


PC

Q

MC1

AC1

P1

Q1

D1MR1

238


PC

Q

MC1

AC1

P1

Q1

D1MR1

239


PC

Q

P1

Q1

D1MR1

AC1

MC1

240


PC

Q

P1

Q1

D1MR1

AC1

MC1

241


PC

Q

P1

Q1

D1MR1

AC1

MC1

242


PC

Q

D2

AC1

MC1

243


PC

Q

D2

MR2

AC1

MC1

244


PC

QQ2

D2

MR1

AC1

MC1

245


PC

Q

P2

Q2

D2

MR1

AC1

MC1

246


PC

QQ1

P2

Q2

D2

MR1

AC1

MC1

247


PC

Q

MC2

AC2

P1

Q1

P2

Q2

D2

MR1

AC1

MC1

248


PC

Q

MC2

AC2

P1

Q1

D1MR1

P2

Q2

D2

MR2

AC1

MC1

249


PC

Q

P2

Q2

D2

MR1

AC1

MC1

250


PC

Q

P2

Q2

D2

MR1

AC1

MC1

251


PC

Q

P2

Q2

D2

MR1

AC1

MC1

↑ ↑

252


PC

Q

P2

Q2

D2

MR1

AC1

MC1

↑ ↑↑

↑

253


PC

Q

P3

Q3

D3

AC1

MC1

MR1

254


PC

Q

MC1

AC1

P4

Q4

D1MR1

Parma Ham Consortium

• (from the Consortium Web site)

• “What is the Consortium • The voluntary Consortium of Parma Ham was set up in 1963, on the

initiative of 23 producers with the objectives of safeguarding the genuine product and the image represented by the name 'Parma'.

• Domestic and international demand continues to grow and the Consortium now has 189 members.

• The Consortium meets market demands whilst rigorously adhering to the traditional production methods and rejecting everything that does not meet the highest quality standards.

• The Consortium's quest for perfection was acknowledged by the EU in 1996 when Parma Ham became one of the first meat products to be awarded the Designation of Protected Origin status.

256

Public goods

• Non-rivalry in consumption

• Non-excludability

• Difficulty of allocating costs of production

• Reduced production incentives

• Supply is lower than demand

257

Non-transferable goods

• Presence of tacit knowledge (non tradable goods)

• Difficulties in assigning property rights

• Non contractability

• Supply shortage (Risk of abuse)

258

Indivisible goods

• Huge volume and fixed size of the single production batch

• Not detachable entities

• Mismatch between the volume of demand and minimum size

of supply


x1

C

Q

ACa1

ACa

ACb

ACc

ACb3

2x1

260

Individual action

• Size growth/Hierarchy

• Acquisitions

261

Interfirm Cooperation

• Consortia• Formal agreement• Resources sharing

262

Interfirm Cooperation:Expected benefits

• Overcoming limits of critical mass, assignment of property rights and learning and skill constraints

• Reduction of supply shortage

• Exploitation of partially idle resources

Check List

Individual Firm 0 1 3 5

Economie of Scale

Economies of Scope

Economies of Specialization

Reduction of Transaction Costs

Risk sharing

Collusion Payoffs

Internalization of Esternalities

Exploitation of Resource Complementarity

Lower Market Incompleteness

Check ListExpected Gross Benefits of ……………………………

Interfirm Cooperation 0 1 3 5

Economie of Scale

Economies of Scope



Risk sharing

Collusion Payoffs





Acquisition & Merger 0 1 3 5

Economie of Scale

Economies of Scope



Risk sharing

Collusion Payoffs





Check ListGross Expected Benefits

• Individual Firm

• Interfirm Cooperation

• Acquisition&Merger

Documents

Facoltà di Economia U niversità degli Studi di Parma Cooperation and Competition Among Firms