Chapter 9: Tacit Collusion: Coooperation to Reduce Competition

One of the primary focuses since the beginning of the course has been competition. What company's in competition with another? How to drive competition? Who's the biggest competitor? Are all questions that were used to guide discussions regarding our company position within their respective industries. However, chapter 9 in Barney's text leads the discussion in a completely different direction with the tacit collusion concept.

Described in the textbook as an act when

...firms in an industry agree to coordinate their strategic choices to reduce competition in an industry. In the extreme, collusion occurs when firms coordinate their output and pricing decisions. In some circumstances, such collusion can lead to economic profits. As suggested earlier in this chapter, explicit collusion exists when competition-reducing decisions are coordinated directly, through direct communication and negotiation. This kind of collusion is illegal in most developed economies. Tacit collusion exists when these decisions are not coordinated through direct communication and negotiation, but coordination develops nevertheless.

Through examination, it is observed that Chipotle really has no competition in their industry. As discussed in other posts, Chipotle is leading the way in revolutionizing the upscale fast food industry with innovative menu items, organic ingredients and trendy appeal to millennials. Therefore, the tacit collusion referenced in the text is not present in the strategic planning of Chipotle's business operations.

However, it should noted that Chipotle is the exception and not the rule. Overall, the fast food industry is full of collusion within the leading companies. The US fast food industry generated about $190 billion in revenue last year. While places like Chipotle, Chop't and Panera Bread are starting to gain great strides in the marketplace due to their devotion to "healthfulness" of their products; the average burger and fry restaurants are striking back.

Fast food over the two decades have transitioned from "fun time fare" to food for those who have limited access to healthier options. Places like Detroit which tote a high poverty and unemployment rate among its residents, live in a "food desert" where people mainly rely on these inexpensive fast food restaurants and convenience stores for meals as access to supermarkets are not simply attainable. Therefore, those lower end fast food chains (McDonald's, Burger King, Wendy's, Checkers) have acquired prominent placement in these communities to grow revenue.

While these is only so much diversification that can take place in this industry, it seems as if the major four companies engaged in some form of tacit collusion in their business strategies in the latter part of 2015 and early 2016 by unveiling their $5.00 meals. Similar to the dollar menu concept that emerged a decade ago, it seems as these companies now look to entice customers with affordable/cheap multi item meals that include a drink and dessert to contest the progress of companies like Chipotle in the marketplace.

Through this collusion, the willingness customers have for wanting to purchase higher end fast food items could potentially diminish thereby eliminating the Panera Breads and Chipotle of the world. Certainly, the higher end fast food would still continue do business in the same marketplace but its revenue would be hampered as the cheaper places would be seen as the go to for many individuals for its price point. For those who did not buy into the marketing schemes, an overall reduction in the purchase of fast food would be likely as the overall marketplace would be devalued.