An agreement between multiple businesses to each specialize in the production of a narrow or specific range of goods or services. The general rationale is that the market for such goods cannot support the sunk cost or investment necessary for the parties to the agreement to each-compete effectively in the space and that specialization thus leads to greater efficiency and cheaper supply of the specialized products. Such agreements are often reached with respect to component parts, which are then supplied to non-manufacturing parties at close-to-cost. Specialization agreements are divided into agreements whereby:
- one party gives up a manufacturing activity or services area in favor of another party (unilateral specialization);
- each party gives up a manufacturing activity or services area in exchange for a like commitment form another party (reciprocal specialization); and
- (c) the parties agree to jointly manufacture or provide services (joint production).