Reciprocity in An Uncertain Environment

• Author: Roger D. Blair
• Published date: 01 June 1976
• Date: 01 June 1976
• DOI: http://doi.org/10.1177/0003603X7602100203
• Subject Matter: Article

RECIPROCITY IN AN UNCERTAIN ENVIRONMENT

by

ROGER

D.

BLAIR·

Reciprocity

can

be

defined

as

mutual

trading

on a

quid

~

quo

basis,

i.e.

mutual

trading

that

is

unexplained

by

chance

or

ordinary

cost

advantages.

lThe

economics

literature

on

reciprocity

reveals

a

lack

of

consensus

regarding

its

inherent

logic

and

competitive

effects

when

the

market

structure

is

imperfect.

The

critics

2

of

reciprocity

generally

contend

that

the

practice

leads

to

market

foreclosure

with

its

attendant

deleterious

effect

on

competition,

i.e.,

restricted

out-

put

and

raised

price.

Those

who

are

skeptica1

3

of

this

view

contend

that

reciprocity

is

an

indirect

exercise

of

monopoly

power.

Moreover,

reciprocity

cannot

achieve

indirectly

anything

that

the

firm

could

not

achieve

directly.4

Thus,

any

ill

resulting

from

reciprocity

would

oc-

cur

in

any

event

as

a

result

of

the

market

structure.

In

contrast,

there

appears

to

be a

consensus

that

reciprocity

either

makes no

sense

or

is

innocuous

in

a

competitive

setting.

The

critics

probably

would

still

object

to

the

introduction

of

"an

irrelevant

and

alien

factor"

into

the

decision

process,

but

basically

there

is

a

lack

of

concern

in

competitive

markets.

Recently,

we

have

seen

significant

modifications

of

the

neo-

classical

theory

of

the

firm

due

to

the

formal

consideration

of

uncer-

tainty

in

the

model.

Nearly

every

relationship

or

optimality

condition

is

qualified

by

the

presence

of

uncertainty

and

the

firm's

attitude

University of Florida.

271

272

THE

ANTITRUST

BULLETIN

toward

risk.

The

purpose

of

the

present

paper

is

to

examine

the

logic

of

reciprocity

and

its

consequences

under

conditions

of

uncertainty.

More

specifically,

we

shall

suppose

that

demand

is

random.

Further,

we

shall

employ

the

reasonable

assumption

that

production

is

not

in-

stantaneous,

which

means

that

production

decisions

will

have

to

be

made

prior

to

observing

the

actual

demand

function

in

any

time

period.

Since

the

real

world,

in

which

reciprocity

is

alleged

to

exist,

is

filled

with

uncertainty

to

one

degree

or

another,

.we

shall

be

taking

a

step

forward

toward

the

real

world.

In

addition,

it

is

clear

that

the

results

of

our

analysis

have

important

public policy

implications.

5

I.

Reciprocity

and

Uncertainty:

Pure

Competition

Assume

that

firm

A,

firm

S,

which

is

a

wholly-owned

subsidiary

of

A,

and

firm

B

operate

in

competitive

industries

and

buy

inputs

in

competitive

markets.

The

competitive

environment

of

each

firm

necessarily

makes them

quantity

setters

since

each

feels

unable

to

in-

fluence

price.

In

other

words,

the

competitive

firm

views

price

as

an

exogenous

variable

and

adjusts

its

output

to

cope

with

the

exogenously

determined

price.

Suppose

that

B

produces

an

intermediate

good

that

A

uses

in

the

production

of

its

output.

In

addition,

we

shall

assume

that

B

requires

an

intermediate

good

for

its

productive

process

that

is

pro-

duced

by

fi~m

S.

Thus,

we

have

a

situation

that

contains

the

potential

for

a

reciprocity

agreereent,

viz.

the

firms

~equire

each

other's

products.

Since

each

of

the

firms

sells

its

output

in

a

competitive