Multimarket competition and alliance formation

How does competition drive cooperation? To shed light on this question, we examine the association between multimarket competition (MMC) and the formation of horizontal alliances. Early research has focused on the implications of MMC for competitive pressure, market entry or exit, and firm performance. It has argued that MMC facilitates mutual forbearance, which establishes implicit cooperation. Recent research reveals that MMC between two rivals increases their propensity to form a joint alliance, assuming alignment between implicit and explicit cooperation. In turn, we shift focus from the dyad to the firm, and examine how explicit cooperation substitutes for implicit cooperation. We suggest that mutual forbearance emerges only at high levels of MMC, whereas at low levels, horizontal alliances mitigate the competitive pressure associated with increasing MMC. Once mutual forbearance is established, implicit cooperation substitutes for explicit cooperation, resulting in an inverted U-shaped association between MMC and the formation of horizontal alliances. We further suggest that as firms grow, their internal assets deter rivals, so that firm size mitigates the reliance on mutual forbearance and weakens the association between MMC and the formation of horizontal alliances. Panel data on 242 US software firms during 1990–2001 support our conjectures.