Industrial Organisation

Cooperative relationships between firms can take various forms such as Strategic Alliances, Joint Ventures, Industrial Districts, Research and Development (R&D) networks…etc. In this essay I will be discussing whether cooperative relationships are a barrier to competition or a precondition for competitive performance.

Conventional economics theory states that to ensure optimal outcome there must be perfect competition. Thus, cooperation is a form of collusion against public interest, therefore governments try to regulate such inter-firm relations and promote perfect competition. Cooperative relations as such are seen as a barrier for new start-ups in a market.

Alfred Marshall is the ‘father of the modern concept of industrial districts’. He discovered the concept during the 19th century. The concept was very successful despite the firms being clustered together. Industrial districts are defined as ‘an area where a concentration of firms have settled down’ with a decentralized structure of working. Marshall identified the advantages that were associated with these districts:

1. Accumulation of skills, skills were inherited and passed down through generations. Workers educate one another and learn by doing.

2. The Growth of Subsidiary trades: small firms specialize and the production process is divided efficiently, as firms work there is an optimal mix of cooperation and competition at each stage of the supply chain. There is cooperation as one’s product complements another. This method promotes efficient use of resources.

3. Innovation, since there is competition horizontally, firms come up with new ideas and build upon them. There is constant innovation in industrial districts, ‘if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas’. An ‘industrial atmosphere’ is created, where good ideas flow in the ‘air’.

The competitive edge that is provided to...