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On the Non-Optimality of Cost Sharing Input Joint Ventures

 

Where economies of scale are a feature of the production process, this element may be rationally organised as a specialised “input joint venture”. There are, however, transaction costs associated with co-ordination failures in the settlements between the joint venture and the parent firms. When the rule of settlement is cost sharing or average cost pricing and the parent firms are oligopsonists in their purchase of the specific input, the transaction costs – like the economies of specialisation – increase with the number of parent firms, and in the economies of scale. The conditions that make the joint venture formation favourable compared to self-provision in independent firms, are rather weak, but, surprisingly, larger economies of scale do not necessarily favour joint venture organisation.