Membership and Incentives in Network Alliances

Abstract

We propose a general and precise model of a network alliance that addresses both the role of membership and the role of incentives in the coordination of actions and interactions of network alliance members. Using examples in such disparate industries as professional engineering, accounting services, and commercial fueling as the basis of our model, we show that a commission fee chosen by the network provider can be combined with a classical exclusivity agreement-which does not restrict where members recruit customers, while at the same time protecting the members' locations where customers are served-to motivate increases in member investment and, consequently, in network profits. We also show that the most profitable network size emerges naturally. That is, the most profitable network size restricts membership, and emerges as a consequence of the exclusivity agreement and the setting of the commission fee. Our results require that members' investments are more valuable with increases in other members' investments, that prospective members are sufficiently different that there is an adequate range in the business potential of members, and that the effect of other members' investments on a given member's business potential is moderately low.