Teaming Up for Sustained Performance: A Repeated-Game Model of Voluntary Horizontal Collaboration

Abstract

This paper presents a model to characterize the dynamics of and rationale for voluntary horizontal collaborations commonly seen in global supply chains and organizations. Examples of such collaborations include supply clusters, supplier alliances, and teams of peers within organizations. The model consists of two key elements. One is a repeated game framework that captures the dynamics of the underlying environment, such as the long-term interactions between individual players who have limited capabilities and face uncertain demand. The second element is a peer help mechanism, which articulates the implicit short-term cost and long-term benefit of team production and generate synergies among the players. Our analysis shows that the emergence of horizontal collaborations depends on the difference between the individual players’ productivity levels, players’ patience, and the prevalence of high performers on the team. We also show that equilibrium team size is determined by the cost/technology structure of the collaboration, which varies depending on what kind of asset (e.g., inventory or capacity) is shared. We further extend the model to a principal-agent framework, in which the principal can benefit from forming teams of agents but cannot enforce or monitor whether peer help occurs. Finally, we characterize the optimal compensation and team structure for the principal to assign agents to teams.

Keywords: sustainability, horizontal collaboration, team formation, global supply chain, repeated games