Co-operation and Co-ordination
This chapter is a theoretical interlude designed to introduce tools, arguments, and concepts which are used extensively in later analysis. The essence of the firm is a set of relationships among its stakeholders and between itself and other firms. This chapter is concerned to describe the principal functions of these interactions. The most important objectives of commercial relationships are co-operation (joint activity towards a shared goal), co-ordination (the need for mutually consistent responses), and differentiation (the avoidance of mutually incompatible activities).
I believe that game theory is a helpful way of describing the nature of these relationships. So while my discussion of co-operation begins from the familiar business problem of achieving success in a joint venture, I go on to explain how that issue can be described by the most famous of all games-- the Prisoner's Dilemma. The objectives of co-ordination and of differentiation are represented by the Battle of the Sexes and the game of Chicken respectively. I also describe the paradox of commitment--how it is possible to gain by limiting one's own options.
One of the most important insights to be gained from this formal approach to these questions is an understanding of why it is that recognition of these management problems is such a small step on the road to their solution. Explanation of the undoubted benefits of co-operation is rarely enough to bring about co-operative behaviour. This response requires a more subtle reconciliation of the interests of the individual as individual and those of the individual as a member of a group. Achieving co- ordination and differentiation also depends on appropriate incentive structures. The discussion leads, in Chapter 4, to a description of how relationships can be structured to reduce or avoid problems of non- co-operation, disco-ordination, and inadequate differentiation.