I suspect if you ask many people their perception of business life, they will be driven by images of Jordan Belfort running amok in Wolf of Wall Street. It’s an image that depicts business as war, with a win at all costs mentality.
Perhaps unsurprisingly, a new study highlights just how misleading this perception is. It shows that companies in syndicated financial markets, such as reinsurance, are just as likely to exhibit cooperative behaviors as they are competitive ones.
In such an environment, the ultimate goal isn’t to destroy your rival but rather for all parties to do well and value to be spread around many players. For instance, it’s common for rivals to cooperate towards shared standards that benefit the whole market.
Cooperation
The study found that cooperation emerged especially when firms were not in a direct, transactional relationship with one another. Then, they will veer towards decisions that boost the long-term health of the market rather than adopting win at all cost decisions. Interestingly, this is largely an unspoken rule within the market, and runs directly counter to the image of the sector as cut-throat and competitive. Individual firms are simply making skilled decisions to ensure that the overall market stays healthy, whilst maintaining their own competitive edge.
What’s more, these motivations tend to shift depending on the particular deal being worked on. These seemingly small acts add up to something considerable however, so should not be discounted.
“The relational element in the competitive dynamics of the reinsurance industry is interesting. Reinsurance is a $260 billion financial syndicated market with large scale competition. But multiple competitors take shares in a deal at the same price and syndication is a way to share the risk and increase the chances that all competitors might survive any particularly large-scale catastrophic loss,” the authors say.
When the industry is syndicated, there is a clear relational incentive to keep prices high among competitors, which then helps to set the going market rate for the market.
“A primary goal within pricing is to provide a good quality playing field for all competitors rather than necessarily to beat a rival. However, syndication does not equate to a lack of competition. As our study shows, market players remain highly competitive in also wanting a share of the best deals,” the paper says.
It is very unlikely however that, in relational markets, firms will engage in a race to the bottom, but instead work collectively to ensure that the market remains healthy for all players.
Suffice to say, colluding on prices is very different to cooperating on standards and so on, with price fixing very damaging to consumers whereas standards are beneficial to them. The paper is interesting nonetheless however.
