While I applaud FredPenner’s detailed scheme to wrest the Colonel’s secret recipe from the hands of the corporate entity that is KFC, the economist in me can’t help but notice the futility of his plan. Before I go into the economic rationale behind why his plan won’t produce a positive outcome for anyone involved, let’s make a few assumptions. The first assumption is that KFC does indeed have a secret recipe (one that is not simply a cheap marketing gimmick), and they are utilizing that secret recipe to somehow differentiate their product from other fried chicken in the market. This secret recipe allows them to create a product that is “better”, and allows KFC to artificially increase the price of their chicken over others. The second assumption is that FredPenner’s master plan succeeds, and he becomes the only non-KFC-affiliated person on Earth who knows the secret combination of eleven delectable herbs and spices. The third assumption is that FredPenner, KFC, and all other fried chicken makers are rational actors who are looking to improve their own payoff; otherwise, why would FredPenner bother to discover the recipe in the first place?
Now, what can FredPenner do with the Colonel’s recipe now that he has it? Unless he’s already a chicken-making mogul, the answer is “very little”. He can use it to start his own fried chicken restaurant, but without a significant amount of
capital, he’d be unable to compete with KFC since the company already has a
significant share of the market. KFC can engage in
predatory pricing in the short-term to force his fledging chicken enterprise out of business. Poor FredPenner will be worse off than when he started.
FredPenner has another option; he can try to sell the recipe to KFC’s main competitor. Without delving too deep into the market share distribution of the fried chicken industry, let’s just assume it’s
Popeyes Chicken and Biscuits. Popeyes can use the recipe to improve its own chicken, but then both Popeyes and KFC would have identical products, or
perfect substitutes. Without any real difference between the products, consumers will just purchase whichever one has a lower price, making both firms lose out on profits when they price-cut each other. It’s not in Popeye’s interest to buy the corporate secret from FredPenner.
FredPenner can choose to release the secret recipe to the public under the belief that finger-lickin’ good chicken is a
god-given right of humanity. But we’re working under the assumption that he’s a rational actor looking to maximize his payoffs, and revealing the secret for free won’t earn him any tangible benefits. He'll only damage KFC and Popeyes’ market shares, but since he’s not gaining anything, he’s just being vindictive and creating a
Pareto inefficient outcome. The best he can do is try to blackmail KFC for money by threatening to release the secret, but if KFC used
backwards induction, they’d quickly find that FredPenner has a payoff choice between keeping quiet and gaining nothing, or releasing the secret and facing arrest/litigation for blackmail. KFC would then refuse to give in to his demands since he has nothing to gain but everything to lose. So unless FredPenner derives great satisfaction from being the
Che Guevara of the fried chicken industry, his plan to uncover the Colonel’s closely guarded secret is a doomed one as far as economics is concerned.
A real-life example of all these decision-making economic concepts can be found in the soda industry, as
Coca-Cola employs a similar marketing strategy with its “secret formula” for Coke. In July 2006,
PepsiCo cooperated with authorities and Coca-Cola in a sting operation to root out Coca-Cola employees who were planning on selling company secrets for $1.5 million. If the crooks had only consulted me beforehand, or taken basic economics courses, they might have given up their foolhardy ploy and just stuck with their dayjobs.