Collusion definition
/What is Collusion?
Collusion occurs when two or more parties that normally compete secretly decide to work together to gain an advantage. The general approach is to either restrict supplies of goods in order to drive up prices or to set artificially high prices. Cases of collusion are frequently illegal, since they are governed by antitrust laws. The outcome of collusion is that the consumer ends up paying higher prices than would have been the case if there had been a heightened level of competition.
Collusion is difficult to coordinate if there are many competitors in a marketplace. Consequently, it is most commonly found in oligopoly situations where there are only a few competitors, or where just a few competitors have most of the market share.
Characteristics of Collusion
The key characteristics of collusion are as follows:
Agreement between competitors. Firms secretly agree to set prices, limit production, or divide markets instead of competing fairly. These agreements can be formal (cartels) or informal (tacit collusion).
Prices are fixed. Competitors agree to raise, lower, or stabilize prices instead of allowing market forces to determine them. This leads to higher prices for consumers and reduced competition.
Market is shared. Companies divide markets by region, customer type, or product to avoid direct competition. For example, two airlines agree that one will only operate on certain routes while the other avoids those areas.
Output is restricted. Firms limit production to create artificial scarcity, thereby driving up prices. For example, OPEC reduces oil production to maintain high oil prices.
Bids are rigged. Competitors coordinate bids for contracts so that a specific firm wins. For example, construction companies take turns winning government contracts by submitting pre-arranged bids.
Secretive. Collusion is usually hidden from regulators and consumers.
Involves a small number of firms. Collusion is more common in oligopolies, where a few dominant firms control the market. It is easier when fewer firms are involved and communication is easier.
Indicators of Collusion
There are a number of indicators that collusion may be present. Here several examples of indicators:
When prices are set by a group of suppliers at a uniformly high or low level, so there is no actual pricing competition occurring.
When suppliers refuse to sell in each other’s territories, thereby effectively creating regional monopolies.
When some suppliers routinely refuse to bid in competitive bidding situations, which allows the remaining bidder to bid at an unusually high price.
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Examples of Collusion
Examples of collusion are as follows:
Several high tech firms agree not to hire each other's employees, thereby keeping the cost of labor down.
Several high end watch companies agree to restrict their output into the market in order to keep prices high.
Several airlines agree not to offer routes in each other's markets, thereby restricting supply and keeping prices high.
Several investment banks decide not to bid on certain deals with clients, thereby reducing the number of bids and keeping prices high.