Implementable mechanisms to coordinate horizontal alliances

Unprecedented changes in the economics of interaction, mainly as a result o f advances in information and telecommunication technologies such as the In ternet, are causing a shift toward more networked forms of organizations su ch as horizontal alliances - that is, alliances among firms in similar busi nesses that have positive externalities between them. Because the success o f such horizontal alliances depends crucially on aligning individual allian ce-member incentives with those of the alliance as a whole, it is important to find coordination mechanisms that achieve this alignment and are simple -to-implement. In this paper, we examine two simple coordination mechanisms for a horizontal alliance characterized by the following features: (i) fir ms in the alliance can exert effort only in their "local" markets to increa se customer demand for the alliance; (ii) customers are mobile and a custom er living in a given alliance member's local area may have a need to buy fr om some other alliance member; and (iii) the coordination rules followed by the alliance determine which firms from a large pool of potential member-f irms join the alliance, and how much effort each firm joining the alliance exerts in its local market. In this horizontal alliance setup, we consider the use of two coordination mechanisms: (i) a linear transfer of fees betwe en members if demand from one member's local customer is served by another member, and (ii) ownership of an equal share of the alliance profits genera ted from a royalty on each member's sales. We derive conditions on the dist ribution of demand externalities among alliance members to determine when e ach coordination mechanism should be used separately, and when the mechanis ms should be used together.