Friendly Competition in the Economy
Businesses, firms, companies, corporations, institutions. These are all entities that participate in the economy and strive for outstanding profits, efficiency, and organization. Yet, there are always many other motives, such as wealth, recognition, and power. With such high stakes and a growing number of people operating within the business world, it is not surprising to see competition crop up at that heart of the world economy.
However, businesses are fundamentally people with capital and some idea. Just as people tend to befriend one another for mutual benefit, why shouldn’t businesses? Competition is sometimes effective at catering to people’s desires (and game theory analysis may favor such a strategy in some cases), so it seems to be the most direct way to contest related companies. But, ruling out the possibility that obtaining alliances could benefit businesses takes a deeper understanding of relationships between companies in general.
I have studied parts of two articles: one from the Strategic Management Journal investigating how cooperative relationships between organizations are structured, and another from the Journal of Industrial & Business Marketing on both cooperation and competition relationships in business networks. On paper, creating alliances between a pair of business partners is appealing, since pooling (a portion of) the resources of multiple firms allows their processes to be more efficient. However, these situations are quite dynamic as in no way does the formation of alliances lessen competition in the market. In addition, forming trust between two firms is about as difficult as trusting another person; there is no guarantee a partner will adhere to a contract, and there is no telling whether a partner plans to hurt you in long term.
In other words, there is risk involved with transactions and sharing resources between competitive firms. So what kind of cooperation do we see in businesses today? In general, there are far fewer economic exchanges in cooperative business relationships than information or social exchanges. This is quite practical, since when it is difficult to pinpoint a fellow competitor’s motives, creating economic dependencies with it could be dangerous. However, when it comes to businesses in the same industry with similar business models and strategies, there is much more potential for competitors to come together. Namely, companies in the same “strategic group” understand each other and their needs, so the competition is less fierce.
So, are these positive relationships beneficial enough to be necessary? Competition will always remain, so some may be disinclined to take the risk of being taken advantage of. On the other hand, forming long-term bonds between two companies will improve both of their chances of benefitting each other. It appears that there is both incentive for and against cooperative relationships; the formation of them depends heavily on the decisions involved and the type of resource that will be exchanged.
So how can we relate the complications of business rivalry and friendship to network analysis? For starters, if we represent these relationships as edges in a graph of businesses, we will first note that businesses in unrelated industries may or may not have any relationship. If there are separate components, the members of each component will be competitors within one or several related industries. Broadly representing each edge as having a strictly competitive or cooperative nature (- or +) simplifies our model, but runs into issues quickly. When it comes to relationships between people, a triangle of three negative relationships is unusual, as two may work together so they may both succeed. This fundamental idea supports the notion of doing the same with businesses, but the incentives of companies are far more complex and difficult to read into. Unfortunately, risk and mutual understanding are huge factors that may prevent a business network from being “structurally balanced.”
Business networks exist, but characterizing its components becomes overwhelmingly difficult as their complexity (as well as variety) is simply through the roof. The relationships are only really meaningful if we study individual industries; that is where the competition and cooperation are the strongest. With more and more startup companies joining the fray, constant updates would be necessary to thoroughly study relationships. For now, we’ll just have to accept that making friends in the business world is not going to become straightforward anytime soon.