Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to attain objectives forbidden by law; for example, by defrauding or gaining an unfair market advantage. It is an agreement among firms or individuals to divide a market, set prices, limit production or limit opportunities.[1] It can involve "unions, wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties".[2] In legal terms, all acts effected by collusion are considered void.[3]

Definition

In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Conspiracy usually involves an agreement between two or more sellers to take action to suppress competition between sellers in the market. Because competition among sellers can provide consumers with low prices, conspiracy agreements increase the price consumers pay for the goods. Because of this harm to consumers, it is against antitrust laws to fix prices by agreement between producers, so participants must keep it a secret. Collusion often takes place within an oligopoly market structure, where there are few firms and agreements that have significant impacts on the entire market or industry. To differentiate from a cartel, collusive agreements between parties may not be explicit; however, the implications of cartels and collusion are the same.[4]

Under competition law, there is an important distinction between direct and covert collusion. Direct collusion generally refers to a group of companies communicating directly with each other to coordinate and monitor their actions, such as cooperating through pricing, market allocation, sales quotas, etc. On the other hand, tacit collusion is where companies coordinate and monitor their behavior without direct communication. This type of collusion is generally not considered illegal, so companies guilty of tacit conspiracy should face no penalties even though their actions would have a similar economic impact as explicit conspiracy.

Collusion results from less competition through mutual understanding, where competitors can independently set prices and market share.[5] A core principle of antitrust policy is that companies must not communicate with each other. Even if conversations between multiple companies are illegal but not enforceable, the incentives to comply with collusive agreements are the same with and without communication. It is against competition law for companies to have explicit conversations in private. If evidence of conversations is accidentally left behind, it will become the most critical and conclusive evidence in antitrust litigation. Even without communication, businesses can coordinate prices by observation, but from a legal standpoint, this tacit handling leaves no evidence. Most companies cooperate through invisible collusion, so whether companies communicate is at the core of antitrust policy.[6]

Collusion is illegal in the United States, Canada, Australia and most of the EU due to antitrust laws, but implicit collusion in the form of price leadership and tacit understandings still takes place.

Tacit Collusion

Covert collusion is known as tacit collusion and is considered legal. Adam Smith in The Wealth of Nations explains that since the masters (business owners) are fewer in number, it is easier to collude to serve common interests among those involved, such as maintaining low wages, whilst it is difficult for the labour to coordinate to protect their interests due to their vast numbers. Hence, business owners have a bigger advantage over the working class. Nevertheless, according to Adam Smith, the public rarely hears about coordination and collaborations that occur between business owners as it takes place in informal settings.[7] Some forms of explicit collusion are not considered impactful enough on an individual basis to be considered illegal, such as that which occurred by the social media group WallStreetBets in the GameStop short squeeze.[8] There are many ways that implicit collusion tends to develop:

Base model of (Price) Collusion

For a cartel to work successfully, it must:

Regarding stability within the cartel:

  1. Insist on collusion agreements (now) and promote cooperation (future).
  2. Turn away from the alliance (now) and face punishment (future).

Variations

Suppose this market has firms. At the collusive price, the firms are symmetric, so they divide the profits equally between the whole industry, represented as . If and only if the profit of choosing to deviate is greater than that of sticking to collude, i.e.

As the number of firms in the market increases, so does the factor of the minimum discount required for collusion to succeed.[11]

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 firm.[12] However if all firms collude to increase prices, loss of sales will be minimized, as consumers lack choices at lower prices and must decide between what is available. This benefits the colluding firms, as they generate more sales at the cost of efficiency to society.[4] However, depending on the assumptions made in the theoretical model on the information available to all firms, there are some outcomes, based on Cooperative Game Theory, where collusion may have higher efficiency than if firms did not collude.[13]

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 to maintain sales. When one firm increases its price, its rivals are unlikely to follow, as they would lose the sales gains they would otherwise receive 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.[12]

Collusion may also occur in auction markets, where independent firms coordinate their bids (bid rigging).[14]

Deviation

Future collusive profits
Future collusive profits

Actions that generate sufficient returns in the future are important to every company, and the probability of continued interaction and the company discount factor must be high enough. The sustainability of cooperation between companies also depends on the threat of punishment, which is also a matter of credibility. Firms that deviate from cooperative pricing will use MMC in each market. MMC increases the loss of deviation, and incremental loss is more important than incremental gain when the firm's objective function is concave. Therefore, the purpose of MMC is to strengthen corporate compliance or inhibit deviant collusion.[15]

The principle of collusion: firms give up deviation gains in the short term in exchange for continued collusion in the future.

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[16] and the existence of leniency programs.[17]

Indicators

Some actions that may indicate collusion among competitors are:

Examples

Set higher prices
Set higher prices

United States

Europe

Australia

Barriers

There can be significant barriers to collusion. In any given industry, these may include:

Conditions Conducive to Collusion

There are several industry traits that are thought to be conducive to collusion or empirically associated with collusion. These traits include:

Government Intervention

Collusion often occurs within an oligopoly market structure, which is a type of market failure. Therefore, natural market forces alone may be insufficient to prevent or deter collusion, and government intervention is often necessary.

Fortunately, various forms of government intervention can be taken to reduce collusion among firms and promote natural market competition.

See also

Further reading

References

General references

Inline citations

  1. ^ O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 171. ISBN 0-13-063085-3.((cite book)): CS1 maint: location (link)
  2. ^ Collusion Law & Legal Definition
  3. ^ Collusion [1] Archived 2008-01-09 at the Wayback Machine.
  4. ^ a b "OECD Glossary of Statistical Terms - Collusion Definition". stats.oecd.org. Retrieved 2020-11-01.
  5. ^ Garrod, & Olczak, M. (2018). Explicit vs tacit collusion: The effects of firm numbers and asymmetries. International Journal of Industrial Organization, 56, 1–25. https://doi.org/10.1016/j.ijindorg.2017.10.006
  6. ^ Fonseca, Miguel A.; Normann, Hans-Theo (2012-11-01). "Explicit vs. tacit collusion—The impact of communication in oligopoly experiments". European Economic Review. 56 (8): 1759–1772. doi:10.1016/j.euroecorev.2012.09.002. hdl:10871/14991. ISSN 0014-2921.
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  11. ^ Compte et al., 2002. Olivier Compte, Frederic Jenny, Patrick Rey Capacity, constraints, mergers and collusion European Economic Review, 46 (2002), pp. 1-29
  12. ^ a b Kalai, Ehud; Satterthwaite, Mark A. (1994), Gilles, Robert P.; Ruys, Pieter H. M. (eds.), "The Kinked Demand Curve, Facilitating Practices, and Oligopolistic Coordination", Imperfections and Behavior in Economic Organizations, Theory and Decision Library, Dordrecht: Springer Netherlands, pp. 15–38, doi:10.1007/978-94-011-1370-0_2, ISBN 978-94-011-1370-0, retrieved 2020-11-01
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