Collusion
Encyclopedia
Collusion is an agreement between two or more persons, sometimes illegal and therefore secretive, 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 advantage. It is an agreement among firms to divide the market, set prices, or limit production.
It can involve "wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties". In legal terms, all acts affected by collusion are considered void
.
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. Cartel
s are a special case of explicit collusion. Collusion which is not overt, on the other hand, is known as tacit collusion
.
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 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 will follow suit in order to maintain sales, and when one firm increases its price, 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
.
, Canada
and most of the EU due to competition/antitrust
law, but implicit collusion in the form of price leadership and tacit understandings still takes place. Several examples of collusion in the United States include:
There are many ways that implicit collusion tends to develop:
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
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 advantage. It is an agreement among firms to divide the market, set prices, or limit production.
It can involve "wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties". In legal terms, all acts affected by collusion are considered void
Void (law)
In law, void means of no legal effect. An action, document or transaction which is void is of no legal effect whatsoever: an absolute nullity - the law treats it as if it had never existed or happened....
.
Definition
In the study of economicsEconomics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
and market competition
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
, collusion takes place within an industry
Industry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market structure
Market structure
In economics, market structure .* Monopolistic competition, also called competitive market, where there are a large number of firms, each having a small proportion of the market share and slightly differentiated products.* Oligopoly, in which a market is dominated by a small number of firms that...
of oligopoly
Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
, where the decision of a few firms to collude can significantly impact the market as a whole. Cartel
Cartel
A cartel is a formal agreement among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production. Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products...
s are a special case of explicit collusion. Collusion which is not overt, on the other hand, is known as tacit collusion
Tacit collusion
Tacit collusion occurs when cartels are illegal or overt collusion is absent. Put another way, two firms agree to play a certain strategy without explicitly saying so. Oligopolists usually try not to engage in price cutting, excessive advertising or other forms of competition. Thus, there may be...
.
Variations
According to neoclassical price-determination theoryNeoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
and game theory
Game theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...
, 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 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
Kinked demand
The kinked demand curve theory is an economic theory regarding oligopoly and monopolistic competition. When it was created, the idea fundamentally challenged classical economic tenets such as efficient markets and rapidly changing prices, ideas that underlie basic supply and demand models...
. Firms face a kinked demand curve if, when one firm decreases its price, other firms will follow suit in order to maintain sales, and when one firm increases its price, 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
Bertrand competition
Bertrand competition is a model of competition used in economics, named after Joseph Louis François Bertrand . It describes interactions among firms that set prices and their customers that choose quantities at that price....
.
Indicators
Practices that suggest collusion include:- Uniform pricesPrice fixingPrice fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand...
- A penalty for price discounts
- Advance notice of price changes
- Information exchange
Examples
Collusion is largely illegal in the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
and most of the EU due to competition/antitrust
Competition law
Competition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....
law, but implicit collusion in the form of price leadership and tacit understandings still takes place. Several examples of collusion in the United States include:
- Market division and price-fixing among manufacturers of heavy electricalElectricityElectricity is a general term encompassing a variety of phenomena resulting from the presence and flow of electric charge. These include many easily recognizable phenomena, such as lightning, static electricity, and the flow of electrical current in an electrical wire...
equipment in the 1960s, including General ElectricGeneral ElectricGeneral Electric Company , or GE, is an American multinational conglomerate corporation incorporated in Schenectady, New York and headquartered in Fairfield, Connecticut, United States...
. - An attempt by Major League BaseballMajor League BaseballMajor League Baseball is the highest level of professional baseball in the United States and Canada, consisting of teams that play in the National League and the American League...
owners to restrict players' salariesBaseball collusionBaseball collusion refers to owners working together to avoid competitive bidding for player services or players jointly negotiating with team owners....
in the mid-1980s. - The sharing of potential contract terms by NBA free agents in an effort to help a targeted franchise circumvent the salary cap
- Price fixing within foodFoodFood is any substance consumed to provide nutritional support for the body. It is usually of plant or animal origin, and contains essential nutrients, such as carbohydrates, fats, proteins, vitamins, or minerals...
manufacturers providing cafeteria food to schoolSchoolA school is an institution designed for the teaching of students under the direction of teachers. Most countries have systems of formal education, which is commonly compulsory. In these systems, students progress through a series of schools...
s and the militaryMilitaryA military is an organization authorized by its greater society to use lethal force, usually including use of weapons, in defending its country by combating actual or perceived threats. The military may have additional functions of use to its greater society, such as advancing a political agenda e.g...
in 1993. - Market division and output determination of livestock feed additive, called lysineLysineLysine is an α-amino acid with the chemical formula HO2CCH4NH2. It is an essential amino acid, which means that the human body cannot synthesize it. Its codons are AAA and AAG....
, by companies in the US, JapanJapanJapan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
and South KoreaSouth KoreaThe Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...
in 1996, Archer Daniels MidlandArcher Daniels MidlandThe Archer Daniels Midland Company is a conglomerate headquartered in Decatur, Illinois. ADM operates more than 270 plants worldwide, where cereal grains and oilseeds are processed into products used in food, beverage, nutraceutical, industrial and animal feed markets worldwide.ADM was named the...
being the most notable of these. - Chip dumping in pokerPokerPoker is a family of card games that share betting rules and usually hand rankings. Poker games differ in how the cards are dealt, how hands may be formed, whether the high or low hand wins the pot in a showdown , limits on bet sizes, and how many rounds of betting are allowed.In most modern poker...
or any other high stake card game.
There are many ways that implicit collusion tends to develop:
- The practice of stock analyst conference calls and meetings of industry participants almost necessarily results in tremendous amounts of strategic and price transparency. This allows each firm to see how and why every other firm is pricing their products.
- If the practice of the industry causes more complicated pricing, which is hard for the consumer to understand (such as risk-based pricingRisk-based pricingRisk-based pricing is a methodology adopted by many lenders in the mortgage and financial services industries. It has been in use for many years as lenders try to measure loan risk in terms of interest rates and other fees...
, hidden taxes and fees in the wireless industry, negotiable pricing), this can cause competition based on price to be meaningless (because it would be too complicated to explain to the customer in a short advertisement). This causes industries to have essentially the same prices and compete on advertising and image, something theoretically as damaging to consumers as normal price fixing.
Barriers
There can be significant barriers to collusion. In any given industry, these may include:- The number of firms: As the number of firms in an industryIndustryIndustry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
increases, it is more difficult to successfully organize, collude and communicate. - Cost and demand differences between firms: If costs vary significantly between firms, it may be impossible to establish a price at which to fix output.
- Cheating: There is considerable incentive to cheat on collusion agreements; although lowering prices might trigger price wars, in the short term the defecting firm may gain considerably. This phenomenon is frequently referred to as "chiseling".
- Potential entry: New firms may enter the industry, establishing a new baseline price and eliminating collusion (though anti-dumping laws and tariffs can prevent foreign companies entering the market).
- Economic recession: An increase in average total cost or a decrease in revenue provides incentive to compete with rival firms in order to secure a larger market share and increased demand.
See also
- Collusive lawsuitCollusive lawsuitA collusive lawsuit is a lawsuit in which the parties to the suit have no actual quarrel with one another, but one sues the other to achieve some result desired by both.-Constitutional law:...
- Conscious parallelismConscious parallelismConscious parallelism is a term used in competition law to describe price-fixing between competitors in an oligopoly that occurs without an actual spoken agreement between the parties. Instead, one competitor will take the lead in raising prices...
- Corporate crimeCorporate crimeIn criminology, corporate crime refers to crimes committed either by a corporation , or by individuals acting on behalf of a corporation or other business entity...
- Baseball collusionBaseball collusionBaseball collusion refers to owners working together to avoid competitive bidding for player services or players jointly negotiating with team owners....
- Bowl Championship SeriesBowl Championship SeriesThe Bowl Championship Series is a selection system that creates five bowl match-ups involving ten of the top ranked teams in the NCAA Division I Football Bowl Subdivision , including an opportunity for the top two to compete in the BCS National Championship Game.The BCS relies on a combination of...