Cooperation between competitors is a common phenomenon in modern business. In this thesis, we conduct two studies to investigate the issues of firms’ cooperation behaviors within competition relations, the interplay between competition and cooperation, and how competition and cooperation jointly affect firms’ operational strategies.

In the first study, we consider two competing firms that sell partially substitutable products in uncertain markets. Each product is assembled from some key components and each firm has the option to subcontract only the key component or the final product from its competitor. The subcontracting agreement is reached through a Nash bargaining process, either before or after production and demand realization, referred to as forward and ex-post horizont...[ Read more ]

Cooperation between competitors is a common phenomenon in modern business. In this thesis, we conduct two studies to investigate the issues of firms’ cooperation behaviors within competition relations, the interplay between competition and cooperation, and how competition and cooperation jointly affect firms’ operational strategies.

In the first study, we consider two competing firms that sell partially substitutable products in uncertain markets. Each product is assembled from some key components and each firm has the option to subcontract only the key component or the final product from its competitor. The subcontracting agreement is reached through a Nash bargaining process, either before or after production and demand realization, referred to as forward and ex-post horizontal subcontracting, respectively. We show that the firms should adopt forward horizontal subcontracting when the firms’ cost differential is high and the market uncertainty is low. Otherwise, the firms prefer ex-post horizontal subcontracting. Under forward horizontal subcontracting, one firm will make all the components or final products for both firms, referred to as the make-or-buy strategy, and subcontracting lowers the system cost. Under ex-post horizontal subcontracting, production occurs at both firms and one firm will subcontract from its competitor even under deterministic markets, referred to as the make-and-buy strategy. Ex post subcontracting can not only better match supply with demand under uncertain markets, it also provides an opportunity for competing firms to collude and mitigate competition. Under either forward or ex-post horizontal subcontracting, we identify the conditions under which subcontracting the final products is preferred than the components.

In the second study, we consider a shipping system consisting of one carrier and two shipping forwarders who compete on price for businesses from potential shippers. The carrier may quote different prices or a single price to the two shipping forwarders who will then order shipping capacity from the carrier and set the selling prices to the shippers before market uncertainties are revealed. Inspired by cooperation between competing parties in many industries including the maritime shipping industry, we propose a new model under which the shipping forwarders are allowed an opportunity to purchase shipping capacity from each other after they order capacity from the carrier but before they set the selling prices and satisfy demand, referred to as the capacity reservation model. We show analytically that capacity reservation between competing forwarders benefits both the carrier and the forwarders, leading to a win-win situation under various market conditions. Furthermore, capacity reservation can offset the negative effect of a carrier’s pricing power which enables the carrier to charge discriminatory shipping prices to squeeze more profits out of the forwarders.