Informal market governance in Japan's basic materials industries

Abstract

Too much emphasis has been placed on formal state policies and on ties between individual firms to explain Japanese economic behavior and impediments to imports in Japanese markets. We need to look instead at informal governance by trade associations. In so doing, the concept of relational contracting should be applied not just to dyadic relationships between individual firms but also to relationships between entire industries. Whole industries engage in relational contracting to ensure the stability of both prices and supplies. These industry agreements stabilize Japanese markets but at the same time keep imports out of them. This informal governance complements state policies to support uncompetitive industries. These agreements are more likely to occur and succeed between selling and buying industries that each are relatively concentrated, when upstream products are standardized, when upstream goods constitute a smaller share of downstream production costs, when these sectors have not experienced previous conflicts that undermine cooperation, and when the Ministry of International Trade and Industry wants a domestic supply of its products.