Chapter 9: Cooperative Strategy 289
strategies are illegal in the United States and most developed economies (except in regu-
lated industries). Accordingly, companies choosing to explicitly collude with other firms
should recognize that competitors and regulatory bodies likely will challenge the accept-
ability of their competitive actions.
Tacit collusion exists when several firms in an industry indirectly coordinate their
production and pricing decisions by observing each other’s competitive actions and
responses.^51 Tacit collusion tends to take place in industries dominated by a few large
firms. “With tacit collusion, competitors don’t agree to pricing, but since there are so few
of them they all understand very well how their competition will behave, and are able
to prevent dramatic prices slides by using this understanding.”^52 Tacit collusion results
in production output that is below fully competitive levels and above fully competitive
prices. In addition to the effects on competition within a particular market, research sug-
gests that tacit collusion between two firms can lead to less competition in other markets
in which both firms operate.^53
As suggested above, tacit collusion tends to be used as a competition-reducing,
business-level strategy in industries with a high degree of concentration, such as
the airline and breakfast cereal industries. Research in the airline industry suggests
that tacit collusion reduces service quality and on-time performance.^54 Firms in
these industries recognize their interdependence, which means that their compet-
itive actions and responses significantly affect competitors’ behavior toward them.
Understanding this interdependence and carefully observing competitors can lead to
tacit collusion.
Over time, four firms—Kellogg Company (producers of Kellogg’s Corn Flakes, Fruit
Loops, etc.), General Mills, Inc. (Cheerios, Lucky Charms, etc.), Ralcorp Holdings, now
owned by ConAgra Foods (producing mostly private store brands), and Quaker Foods
North America, a part of PepsiCo (Quaker Oatmeal, Cap’n Crunch, etc.)—have accounted
for as much as 80 percent of sales volume in the ready-to-eat segment of the U.S. cereal
market.^55 The global breakfast cereals market is expected to grow at roughly 4 percent
annually for the next few years, reaching a total of $43.2 billion by 2019.^56 Some believe
that the high degree of concentration in the global breakfast cereals industry results in
prices to consumers that substantially exceed the costs companies incur to produce and
sell their products. If prices are above the competitive level in this industry, it may be a
possibility that the dominant firms use a tacit collusion cooperative strategy.
Mutual forbearance is a form of tacit collusion in which firms do not take competitive
actions against rivals they meet in multiple markets. Rivals learn a great deal about each
other when engaging in multimarket competition, including how to deter the effects of
their rivals’ competitive attacks and responses. Given what they know about each other
as competitors, firms choose not to engage in what could be destructive competition in
multiple product markets.^57
In general, governments in free-market economies seek to determine how rivals can
form cooperative strategies for the purpose of increasing their competitiveness without
violating established regulations about competition.^58 However, this task is challenging
when evaluating collusive strategies, particularly tacit ones. For example, the regulation
of securities analysts through Regulation Fair Disclosure (Reg-FD) as established in the
United States promoted more potential competition through competitive parity by elimi-
nating privileged access to proprietary firm information as a critical source of competitive
advantage. In doing so, research suggests that it led to more mutual forbearance among
competing firms because they had more awareness of information possessed by their
competitors, thus leading to more tacit collusion.^59 In the final analysis, individual com-
panies must analyze the effect of a competition-reducing strategy on their performance