After the wild success of the Nacho Cheese Doritos Locos taco, one might wonder why Taco Bell didn’t immediately create a Cool Ranch Doritos taco. Instead, the company took its time. Taco Bell launched the inevitable companion to its first snack-food-fueled hit only a few months ago, after an additional one-day delay in rollout. In new ads, Taco Bell even makes fun of itself for taking so long to come up with “the world’s most obvious idea.”
The delay is probably an interesting consequence of a somewhat unusual economic condition: bilateral monopoly. That condition occurs when there’s only one buyer and one seller. For instance, someone might be selling a rare family heirloom that holds value only to the sole surviving member of the family. Or, in the classic example, the owner of the sole coal mine in a “factory town” might be forced to bargain with a union of coal workers. There are many other examples.
The Doritos Locos taco presents a kind-of-sort-of bilateral monopoly. Taco Bell is really the only buyer that would find the Doritos mark and license to be quite so useful. Yet Doritos would not find another national retailer who would make as much use of the brand or show as much interest in it. In other words, they can’t live without one another. (An economist would dryly observe that this kind of situation can produce “noncooperation by the seller and the buyer [that] can result in market failure and the nonexistence of both parties.” Ouch.)
But in a bilateral monopoly, a broad range of potential prices can lead to negotiating delay. This is not a situation where supply simply meets demand; rather, the market can “clear” at any number of prices that fall between the monopoly price (that is, the price where the market has one seller) and the monopsony price (that is, the price where the market has one buyer). One might expect the parties just to split the difference and choose the middle of the price range, but that can get complicated where there are differences in bargaining strength. It could be that bargaining strength was a special problem here because (a) Taco Bell needed the sales from the tacos to drive its business, but (b) Doritos needed the licensing and/or royalty fees that could only be derived from a Taco Bell deal.
So the ultimate creation of the Cool Ranch taco is a testament to the power of the parties’ negotiators. And it looks like they came up with some neat solutions. For instance, both parties became buyer and seller, as Taco Bell turned around and let Doritos use Taco Bell’s mark for the new Doritos Locos Doritos chips. As The Huffington Post explains, these are “Doritos chips designed to taste like tacos designed to taste like Doritos.” Brilliant.
In any event, my hope is that the Doritos Locos tacos will end up in economics textbooks one day. They’re certainly a tastier case study than coal mining.