Theory of the Firm Gets Squeezed

Few corporate buyers could find a lower price brand name ketchup than Heinz. Yet, McDonald's recently announced it would no longer stock the iconic ketchup. Teresa Lindeman supplies the money reason:

...the split is more about the people than the product.

Heinz's new corporate leader Bernadro Hees also serves as vice chairman of the board of Burger King, McDonald's rival. Hees continues to serve as a partner in 3G Capital, which owns Burger King and recently acquired Heinz. For McDonalds, the decision appears competitively reasonable given Hees' role with McDonald's supplier and competitor. The world's largest fast casual burger retail fears a leak of its knowledge to a rival. In turn, McDonald's positional advantage could be threatened by the squeezing of its informational resource.

Theory of the Firm, though, would argue against such a decision because it is not priced-based. Ronald Coase, who developed Theory of the Firm, argued for companies making decisions based on cost. A firm selects the outcome with the lowest cost.

Couse would argue that McDonald's should keep Heinz as a supplier if and only if Heinz offered the lowest price ketchup.

Although McDonald's could afford to buy Heinz's market offering, McDonald's could not afford to lose its positional advantage.

Unlike spilled ketchup, spilled knowledge to a rival is worth crying over.