Cartel Behaviour Is Not Just For The Mafia

It is happening all around you and is affecting your businesses chance to thrive.

Bumble Bee Tuna, a U.S. canned tuna business, has been found guilty of cartel behaviour. What that means is that they joined forces with the other major tinned tuna brands to fix the prices of all their tins at a certain price point as well as to reduce the quantity of tuna within each tin.

Tony Soprano – I got nothing to say

When businesses collude in this way it is known as cartel behaviour. Cartels use the market power of existing businesses mainly to:

  • Take more from end customers than they would naturally give by only offering one option
  • Bully suppliers into better arrangements, or fight back against oppressive contracts
  • And the most common reason, to suppress new businesses from entering the market so they don't have to compete with them

 

I am pro-innovation and I want to see a world that has as much innovation as possible. Cartel behaviour is the direct opposite of this, it uses the market power of incumbents (businesses that already exist in an industry) to suppress innovation. A cartel exists when businesses agree to act together instead of competing with each other. This agreement is designed to drive up the profits of cartel members while maintaining the illusion of competition.

It’s bad for the world because:

  • It protects ineffective businesses by making it harder for more effective, new businesses to compete
  • This leads to less innovation in the economy
  • Resources are prevented from being accessed by others
  • It's difficult for businesses growing through honest practices to do so affordably, which also creates a cycle of encouraging dishonest business practice as a means to survive
  • Reduces consumer confidence in an industry sector because the price to access a product or its equivalents is set higher than the market would naturally settle to
  • Forces new entrants to compete on price to survive regardless of innovation

 

It’s very rare that something like this gets noticed let alone brought to justice because it all happens in secret. Those who are rigging the system always do so knowingly and it is kept very secret. The worst thing about this is that it happens in nearly all oligopolies. What is an oligopoly you ask? So we have a monopoly where there is only one player in a market. A duopoly where there are two players (which can also engage in cartel behaviour) and an oligopoly is an industry where there are three or more, but not too many leaders that share the market.

The reason oligopolies nearly always lead to cartel behaviour is because the structure of their environment means that there are lots of incentives to be corrupt. There’s not too many people that they can’t talk to each other and agree on something, there’s few enough that they understand how good it is to have dominant share in the market and they all mutually feel the threat of a zero sum game, where more entrants means less market share for them. So essentially morals is the only thing that stands between an oligarch and engaging in cartel behaviour. It’s easy to justify to yourself why you should protect the empire you’ve built instead of succumb to the inevitable changes that come with anything new. But to do this is to prevent the amazing things that come with change from entering the world.

Whilst cartel behaviour is only illegal in this obvious form, it happens in many other ways too and to be ignorant of this as a small player, is to accept the over 90% failure rate of startups and to be prepared to be counted among them. I know I'm laying on the competitive strategy truths thick here, but if cartels exist for tinned tuna you better believe they're everywhere. The difference is whether or not you are aware.

Salem Evil Laughter

An example I like to give of how this plays out in other areas that affect business is the engagement pod. An engagement pod is a group on any social media platform of different businesses who get together and agree to engage with each others posts to attempt to rig the algorithm so they appear in the main feed. They exist on all main social media platforms not just Instagram.

It works successfully and reliably when all the businesses are large because it says to whichever social media algorithm “this thing is important because other important people have engaged with it” and as long as that metric is a key part of algorithms, so too will this challenge persist. The key is market power, which is why it isn’t the same as one group of businesses supporting each other or one owner using their different businesses to support each other. Most of them happen via Whatsapp as social media private message groups are limited in size in a tokenistic attempt to curb this behaviour. Remember, the social media giants are in an oligopoly too...

It is crucial to understand how the systems you are growing your business in actually work if you are to harness them for your success. I believe new businesses deserve better and humans deserve the fullest capacity of the worlds innovation. As it’s not possible to prevent collusion and other anti-competitive behaviour, what we need to do is find other ways of getting innovation “out there”.

Creating excellent competitive advantage is the best way to do that because you carve out your own mini-monopoly where there are no competitors to prevent your growth. To build strong competitive advantage involves understanding the context your business exists in and how to game 

The other, which is a personal trait, is to decide be generous with your ideas. Now that’s scary because people can and will copy you - I know because it happens to me reasonably often. I am not advocating walking up to would-be competitors and telling them your trade secrets. You can be generous without sacrificing your own chances for success.

The point is, would you rather live in a world where we nourish each others capacity for innovation or where we harm it? I am firmly the former and this ethos touches everything I do. I know I will always have more ideas and that my idea is better shared and then copied, than never to see the light of day at all and I hope to influence those around me to adopt this same approach.

Vote for giving in a world of takers.

If you want to build potent competitive advantage, it's time to book a Business Strategy Session with us.