Ch 9: Tacit Collusion: Cooperation to Reduce Competition

Tacit collusion was actually addressed once in my blog posting "Evaluating Environmental Threats". 

See exerpt from Feb 8:

"Tacit Collusion-  In the past, Dow and Monsanto have worked to strategically cooperate on development of GM corn seeds.  While care was taken to avoid explicit collusion (which is illegal), they also had to attempt to avoid tacit collusion as well, which is sometimes difficult in horizontal alliances." (http://en.wikipedia.org/wiki/Tacit_collusion)

To better understand what tacit collusion is (as the lines seem blurry), let's start with wikipedia that defines it like this:

1. "Tacit collusion occurs where firms undergo actions that are likely to minimise a response from another firm, e.g. avoiding the opportunity to price cut an opposition. Put another way, two firms agree to play a certain strategy without explicitly saying so."

While competition in any industry is good for the consumer, it pushes product and service quality, helps keep prices down, and gives the consumer choices, it is reasonable to see how businesses could benefit from not competing if possible.  This would only be possible if (1) the company had a monopoly on the market or (2) the companies at odds agreed to share amicably serving the best interests of both.

When the latter is the condition, things can get sticky.  A price leader is defined by Barney in the text as "a firm that sets acceptable industry prices or margins."  This characteristic sets the stage many times for collusion.  In an industry where costs for research and development are significant and the time for a product to make it to market is lengthy, there would seem to be much temptation for collusion.  If Monsanto knows that company B Iin the above case, Dow) is working on a specific line of corn seeds, it would be in the best interest of both companies not to invest years and millions of dollars into an identical product.  Thus they cooperate. 

Also, there is much to consider when setting the prices to ensure the costs of R&D are recouped, especially in the agriculture industry where depending on the season/weather/pests and various factors, needs may change and the window of opportunity for sales might be difficult to predict.

That being considered, as long as the competition knows what is in the pipeline for their adversaries, tacit collusion is a non-issue due to the costly-to-duplicate nature of the GM industry.

Flexibility: Real Options Analysis Under Risk and Uncertainty

Businesses must have strategies that allow them to make it through difficult periods.  Depending on the type of market, the level of risk and uncertainty must be weighed and tools should be implemented to help protect the company against times of challenge.  For Monsanto, their strategizing has come under serious scrutiny.  Two of their choices in particular strike a nerve.  

The first: they claim that they have a right to a percentage of sales on all genetically modified resulting crops.  For example, they sell the seed. The farmer grows the crop.  The renewal crop that results the following year is subject to a royalty of 2% each year according to Monsanto.

The second: they are big guns that shoot at little guys.  They are the world's largest seed provider, yet they have sued farmers who unknowingly used genetic modified seeds through third party purchase and were unaware of the renewal royalties expected from Monsanto.

How are they trying to enforce these rules and ensure the continued pay in case R&D is lacking or there are issues with new product?  They are attempting to recreate the copywright/patent that would make any plant derivative of a GMO that started with Monsanto their intellectual property!  Many call this "unnatural".  

"The issue as it concerns Monsanto is not whether the company has a right to sell products and charge for them as it chooses. But essentially, Monsanto holds crops hostage with its position on royalties. The farmer grows his crop using manifold resources including labor. He also grows the seeds that he intends to replant – but finds he cannot until Monsanto is paid again … and again."

If Monsanto owns the rights to a portion of the profits from all future crops because their products were key in developing the original one, this gives them increased flexibility and padding in the event of a bad season for producing or sale of a new product.  Because research and development is very costly to imitate, manufacturing decisions are crucial and can result in heavy losses if the wrong choices are made. 

http://www.infowars.com/monsantos-business-model-a-devious-strategy-to-extend-copyright-into-perpetuity/

Monsanto: Product Differentiation

In Chapter 7, Barney discusses how businesses use product differentiation to their advantage.  There are various way that firms can differentiate their products or services:

Product features

Product complexity

Timing of product introduction

Location

Product customization

Consumer marketing

Product reputation

Linkages among functions within a firm

Linkages with other firms

Product mix

Distribution channels

Service and support

Monsanto utilizes a few of these to their advantage. 

Product features: Monsanto provides seeds that are genetically modified to fight off infestation from weeds and certain pests.  Research and development is constant to stay abreast of the needs of farmers and keep an edge over the competition.

Product complexity: Similar to product features, Monsanto uses this to stay ahead.  Making sure their products meet a particular need, they also have seeds that must be replanted annually to increase sales and stay current.

Timing of product introduction is key to ensure the product is available in time for planting season.

Location:  They produce globally and provide globally.

Consumer marketing and product reputation are two areas where Monsanto could perhaps use a little help.  Lack of regulation on GMOs means they are widely criticized and many end product consumers are speculative regarding the safety and wholesomeness of their genetically modified seeds.  Also, with the company being a producer of chemicals from it's beginning, they carry a stigma they can't seem to shake.