Cooperating with Competitors: When It Makes Sense and Is Allowed

Why working with competitors is an obvious idea

A public authority tenders the maintenance of all school buildings in a district. A small business could handle half, but not all of it. A competitor from the neighboring town has the same problem. Together they would meet the requirements. Similar situations arise in purchasing, when two businesses together would get better terms, or with an expensive testing facility that neither can afford alone.

That raises one question: When is working with a competitor sensible for a small business, when is it permitted, and how does the business protect its know-how in the process? To answer it, we first clarify the terms, introduce the separation principle as a mental model, outline the legal framework, review what research shows, and finally arrive at a check to run before every cooperation.

You may do many things together with a competitor. You just do not talk about prices, customers, or bids.

Terms: coopetition, horizontal agreement, bidding consortium

• Coopetition: A relationship in which companies cooperate and compete with each other at the same time. The term combines the words cooperation and competition.
• Horizontal agreement: An agreement between companies at the same level of the market, that is, between actual or potential competitors. It is subject to stricter competition law scrutiny than an agreement between supplier and customer.
• Bidding consortium: A combination of several companies that submit a joint bid for a specific contract and carry it out together.
• SME cartel (Mittelstandskartell): A cooperation among small and midsize companies that, under § 3 GWB, the German Act against Restraints of Competition, is exempt from the cartel prohibition under certain conditions.

Working with a competitor is a special case of partnership. How partnerships in general are selected, agreed, and managed is described in the guide Setting up sales partnerships. Where it stands compared with own growth and acquisition is explained in the comparison Organic, partnership, or acquisition.

The mental model: coopetition and the separation principle

Maria Bengtsson and Sören Kock (2000) described how companies deal with the tension of being partners and opponents at the same time. Their best-known proposal is the separation principle: cooperation and competition are separated by task. Typically, companies cooperate in upstream activities such as development, purchasing, or production and continue to compete in downstream activities such as sales and marketing. Later research added two further principles: integration, the ability of individuals to keep both roles in mind, and co-management by a dedicated team separated from the rest of the organization.

The separation principle is useful for small businesses for two reasons. It protects know-how, because the partner only sees what is needed for the joint task. And it largely coincides with what competition law requires: the closer a cooperation comes to price and customer, the more sensitive it becomes.

The legal framework: what is allowed and what is not

The basis is the prohibition of anticompetitive agreements in Article 101 of the Treaty on the Functioning of the EU and in § 1 GWB. It applies to all companies regardless of size. Alongside it, there are exceptions that matter for small businesses.

For bidding consortia, contracting authorities often require a justification with the bid explaining why the partners are not bidding individually. According to case law going back to a 1983 decision of Germany’s Federal Court of Justice, there is no competitive relationship if the parties refrain from submitting their own bid for understandable business reasons. How public tenders should be assessed overall for small businesses is described in the guide Public tenders. The article Competition law for small businesses covers the framework of competition law in more detail.

What research shows about coopetition among small businesses

Gernsheimer, Gast, and Kanbach (2024) studied 25 innovation projects, each involving a small or midsize company working with a large competitor. The projects come from agrochemicals, where small specialists develop biological crop protection products and large manufacturers can market them. The authors describe the starting situation clearly: large partners can copy technologies, extract know-how, and use the smaller firm’s capabilities for themselves. Small businesses have less power, and their size and youth make it harder for them to recover from such a loss.

Successful small companies switched between three forms: co-distribution, technology licensing, and joint development. Depending on the form, they combined separation, integration, and co-management, and in the closest form also co-ownership of the results. The authors further emphasize that formal means such as contracts, procedures, and good governance limit opportunistic behavior, and do so most effectively together with informal means such as shared goals, open communication, and continuous dialogue.

In their overview, the authors refer to a study by Lechner and colleagues (2016) of 82 start-ups in Germany, according to which cooperation with larger companies at other levels of the market promoted the small firms’ sales growth. The findings come from innovation projects. For a bidding consortium of two trade businesses, they are an indication of the risks, not a recipe.

Two views: strength through pooling or danger to your own business

The first view emphasizes the opportunities. Small businesses can win contracts together, share costs, and use facilities neither could finance alone. The legislator explicitly recognizes this: the SME cartel under § 3 GWB is intended precisely to improve the competitiveness of small and midsize companies.

The second view emphasizes the dangers. Working with a competitor gives them insight into processes, costing, and customers. What starts in a bidding consortium can be used against your own business in the next competition. Then there is the legal risk: conversations about a joint contract can easily turn into conversations about prices and customers, which are prohibited.

I consider both views justified and see the balance in the separation principle. A cooperation limited to a specific task, based on a written agreement, and explicitly excluding prices, customers, and territories uses the opportunities and limits both risks. How businesses protect their know-how, including from partners, is described in the article Industrial espionage in small and midsize firms.

The check before every cooperation with a competitor

The mental model, legal framework, and findings yield a five-step check. It does not replace legal advice, but it ensures the right questions are asked before the first joint meeting takes place.

1. Purpose in one sentence

   What exactly is to be done jointly, and why is it not possible alone? For a bidding consortium, the capacity calculation belongs here.

2. Separate tasks

   Define which areas are joint and which remain separate. Prices, discounts, customers, and territories never belong in the joint part.

3. Limit information

   Determine which data are exchanged and who sees them. Current prices, capacities outside the contract, and customer lists stay out.

4. Agree in writing

   Purpose, duration, division of tasks, liability, handling of know-how and results, and the end of the cooperation belong in a contract that is reviewed before work begins.

5. Document meetings

   Keep a short agenda and minutes for joint meetings. If the conversation turns to prices or customers outside the contract, end it.

Conclusion: when cooperation makes sense and is allowed

When is working with a competitor sensible and permitted for a small business? It is sensible when it opens access that neither would have alone: a large contract, pooled purchasing, or expensive development. It is permitted as long as it does not touch prices, customers, territories, and bids. Bidding consortia are permitted if the partners could not perform alone or the joint bid rests on a reasonable business decision, and cooperation among small businesses can be exempt as an SME cartel. The separation principle according to Bengtsson and Kock combines both requirements: together where necessary, separate where competition and know-how must be protected. Research shows that small businesses in particular need contracts and ongoing coordination so as not to become the weaker side.

1. This week: Note which contracts or purchases you could not bid for alone in the last two years.
2. Next week: For the most promising case, write the purpose in one sentence and separate joint and separate tasks.
3. Before the first meeting: Have the purpose and the draft contract reviewed by a competition law specialist.

You can recognize a good cooperation with a competitor by the fact that after the contract both compete just as hard for the next customer as before.