dbmaltby

Daily thoughts, observations, and speculations

Tacit Collusion

Chapter 9 discusses tacit collusion. The book defines collusion as existing when an industry agrees to coordinate their strategic choices to reduce competition.  This in turn enables the firm to raise prices above the competitive level.  It can be either explicit, which is illegal, or tacit, which is harder to prove. Tacit collusion is when one firm’s behavior is guided by another firm’s behavior. Under Armour shows no evidence of either tacit or explicit collusion. Instead of looking at how they collude, it is better to look at how they substitute for tacit collusion.

Because UA is in a niche market, and they are relatively small when compared to their large competitors, they are unable to affect any real influence on their competitors to adjust their competitive strategy. So to compete in lieu of tacit collusion, they deploy an aggressive marketing campaign to create a perception of improved quality. The obvious close substitutes at UA’s disposal include vertical integration and product differentiation.

UA does not do much vertical integration and that will be talked about more in next week’s blog. However, UA does do product differentiation – both vertically and horizontally. Vertical differentiation simply means UA differs on its quality, wherein there are many options for similar products in a given market, and the consumer would choose UA’s product because of its superior quality. Horizontal differentiation means UA changes small attributes of their products – like color, traction on the shoes, cut of the t-shirt, etc. – without adjusting the quality of the product.

In Table 9.6, Mr. Barney gives several examples of industry attributes that encourage collusion. UA does not fit those attributes. This is a good thing, because one of UA’s distinctive competencies is its flexibility and adaptability they enjoy with their R&D to adjust to the changing needs of the consumer athlete. Typically with firms that collude, they become top heavy and cumbersome. Because UA is not bridled with these inefficiencies, they are able to more quickly create new products.

So again, UA does not collude. They use their innovative ideas to produce new sports performance apparel. All of this allows them to be responsive and sustain the competitive advantage.

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This entry was posted on March 22, 2013 by .
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