Collusion


Collusion is a secret cooperation or deceitful agreement in order to deceive others, although not necessarily illegal, as is a conspiracy. A secret agreement between two or more parties to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair market advantage is an example of collusion. It is an agreement among firms or individuals to divide a market, set prices, limit production or limit opportunities.
It can involve "unions, wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties". In legal terms, all acts effected by collusion are considered void.

Definition

In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market structure of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Collusion which is covert, on the other hand, is known as tacit collusion, and is legal. Adam Smith in the Wealth of Nations explains that since the masters are fewer in numbers, it becomes much easier for them to collude in order to serve common interests among them, such as keeping the wages of workers low, while it is much more difficult for the labor to coordinate in order to protect their own interests due to their vast numbers. Therefore, business owners have a bigger advantage over the working class. Nevertheless, according to Adam Smith, people rarely hear about the coordination and collaboration that happens between business owners as it happens in an informal way.

Variations

According to neoclassical price-determination theory and game theory, the independence of suppliers forces prices to their minimum, increasing efficiency and decreasing the price determining ability of each individual firm. However, if firms collude to all increase prices, loss of sales is minimized, as consumers lack alternative choices at lower prices. This benefits the colluding firms at the cost of efficiency to society.
One variation of this traditional theory is the theory of kinked demand. Firms face a kinked demand curve if, when one firm decreases its price, other firms are expected to follow suit in order to maintain sales; when one firm increases its price, however, its rivals are unlikely to follow, as they would lose the sales' gains that they would otherwise get by holding prices at the previous level. Kinked demand potentially fosters supra-competitive prices because any one firm would receive a reduced benefit from cutting price, as opposed to the benefits accruing under neoclassical theory and certain game theoretic models such as Bertrand competition.
Collusion may occur also in auction markets, where independent firms coordinate their bids.

Antecedents

Scholars in economics and management have tried to identify factors explaining why some firms are more or less likely to be involved in collusion. Some have noted the role of the regulatory environment and the existence of leniency programs. Others, drawing upon the literature in criminology and misconduct, have suggested that firms conduct a costs/benefits analysis to assess their participation in collusion.

Indicators

Practices that suggest possible collusion include:
Collusion is illegal in the United States, Canada and most of the EU due to antitrust laws, but implicit collusion in the form of price leadership and tacit understandings still takes place. Several examples of collusion in the United States include:
In the EU:
There are many ways that implicit collusion tends to develop:
There can be significant barriers to collusion. In any given industry, these may include: