Co-Opetition - Adam M. Brandenburger [98]
The U.S. antitrust laws can be a bit of a maze. Separate from the way the laws are applied is the logic behind them. The FTC appears to operate from a mental model perhaps more relevant to a bygone era of smokestack industries. It tends to challenge practices that allow companies to sustain prices above variable cost—so-called facilitating practices. That stance doesn’t seem to recognize the new economics of the knowledge-based economy.
Pharmaceuticals, software, jet engines, and other knowledge-based products don’t fit the traditional economic model. Common to all these businesses are huge up-front R&D costs in relation to the variable cost of making the product. If companies aren’t allowed to price above variable cost, they can’t earn back their investments. Rules are one strategy that companies can use to help them maintain prices above variable cost and thereby recoup their up-front investments. We’re not convinced that current U.S. antitrust law appreciates this perspective.
5. Changing the Rules
Just as the cast of players and the players’ added values are important elements of a game, so, too, are rules. Both the significance of rules and the opportunities to change them are often underappreciated.
Too often, people naively assume that “the rules are the rules.” They treat as if carved in stone rules that actually have little behind them. Herb Cohen, master negotiator and author of You Can Negotiate Anything, tells the story of running into a long line at a hotel desk just before the 1:00 P.M. checkout time. Instead of joining the queue, Cohen called up and renegotiated his checkout time to 2:00 P.M. Then he went out and enjoyed a leisurely cup of coffee. When he returned, the line was gone. Cohen’s point: don’t blindly follow rules.
The freedom to change the rules is a double-edged sword. Don’t follow other people’s rules blindly; but don’t count on others to follow your rules blindly, either. Just as you can change the rules or make new ones, so, too, can others.
You can change the rules.
But remember: ether people can change the rules, too; don’t assume your rules will rule.
That’s a good reason not to push a rule too far. For example, if you think that having a meet-the-competition clause gives you a license to keep raising prices to your customers, think again. If a rival comes in with a lower price, the customer is supposed to, even contractually obligated to, give you an opportunity to match. But if your prices were out of line and the rival was able to significantly undercut you, then the customer will quite likely be upset. He’ll realize how much he’s been overpaying. At that point, the customer may decide not to follow the rules. He may switch without giving you the chance to match. Or he may give you the chance to match and then switch even if you do. What will you do then? You can sue your customer, but that’s generally a bad idea, and it certainly won’t be good publicity when people discover what brought you to that point in the first place.
Another reason that your rule may be overturned is either that you lose power or that someone else gains power. Before Nintendo arrived on the scene, the rule in the toy business was that retailers placed their orders in January or February, received the product in the summer, and then waited until December to pay their bills. Nintendo changed the rule. It required retailers to place orders, take delivery, and pay in quick succession. Nintendo was able to rewrite the rules because, as we saw in the Added Values chapter, it had the added value.
In 1994 Maurice Saatchi was ousted from the chairmanship of Saatchi & Saatchi, the advertising