Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open
competition
Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indivi ...
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
Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...
; 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.
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
Void may refer to:
Science, engineering, and technology
* Void (astronomy), the spaces between galaxy filaments that contain no galaxies
* Void (composites), a pore that remains unoccupied in a composite material
* Void, synonym for vacuum, a ...
.
Definition
In the study of
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
and market
competition
Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indivi ...
, collusion takes place within an
industry
Industry may refer to:
Economics
* Industry (economics), a generally categorized branch of economic activity
* Industry (manufacturing), a specific branch of economic activity, typically in factories with machinery
* The wider industrial sector ...
when rival companies cooperate for their mutual benefit.
Conspiracy
A conspiracy, also known as a plot, is a secret plan or agreement between persons (called conspirers or conspirators) for an unlawful or harmful purpose, such as murder or treason, especially with political motivation, while keeping their agree ...
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
An oligopoly (from Greek ὀλίγος, ''oligos'' "few" and πωλεῖν, ''polein'' "to sell") is a market structure in which a market or industry is dominated by a small number of large sellers or producers. Oligopolies often result from ...
market structure
Market structure, in economics, depicts how firms are differentiated and categorised based on the types of goods they sell (homogeneous/heterogeneous) and how their operations are affected by external factors and elements. Market structure makes it ...
, where there are few firms and agreements that have significant impacts on the entire market or industry. To differentiate from a
cartel
A cartel is a group of independent market participants who collude with each other in order to improve their profits and dominate the market. Cartels are usually associations in the same sphere of business, and thus an alliance of rivals. Mos ...
, collusive agreements between parties may not be explicit; however, the implications of cartels and collusion are the same.
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, usually to coordinate and/or monitor their actions, to cooperate through pricing, market allocation, sales quotas, etc. By contrast, tacit collusion is where companies coordinate and monitor their behavior without this direct communication. This 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 is the result of less competition through mutual understanding, where competitors can independently set prices and market share. 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 absolutely at the core of antitrust policy.
Collusion which is covert is known as
tacit collusion
Tacit collusion is a collusion between competitors, which do not explicitly exchange information and achieving an agreement about coordination of conduct. There are two types of tacit collusion - concerted action and conscious parallelism. In a ...
, and is considered legal.
Adam Smith
Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
in the
Wealth of Nations
''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the ''magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in 1 ...
explains that since the masters (business owners) are fewer in numbers, it is easier to collude to serve common interests among those involved, such as maintaining low wages, whilst it is difficult for the labor to coordinate to protect their own 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 hear about coordination and collaborations that occur between business owners as it takes place in informal settings.
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
r/wallstreetbets, also known as WallStreetBets or WSB, is a subreddit where participants discuss stock and Option (finance), option trading. It has become notable for its colorful and profane jargon, aggressive trading strategies, and for playin ...
in the
GameStop short squeeze
In January 2021, a short squeeze of the stock of the American video game retailer GameStop () and other securities took place, causing major financial consequences for certain hedge funds and large losses for short sellers. Approximately 140 ...
.
Base model of (Price) Collusion
For a cartel to work successfully, it must:
* coordinate on the conspiracy agreement.
(Bargaining, explicit or implicit communication)
* Monitor compliance.
* Punish non-compliance.
* Control the expansion of non-cartel supply.
* Avoid inspection by customers and competition authorities.
Regarding stability within the cartel:
* Collusion on high prices means that members have an incentive to deviate.
* In a one-off situation, high prices are not sustainable.
* Requires long-term vision and repeated interactions.
* Companies need to choose between two approaches:
# Insist on collusion agreements (now) and promote cooperation (future).
# Turn away from the alliance (now) and face punishment (future).
* Two factors influence this choice: (1) deviations must be detectable (2) penalties for deviations must have a significant effect.
* Collusion is illegal, contracts between cartels establishing collusion are not protected by law, cannot be enforced by courts, and must have other forms of punishment
Variations
* π(Pc)/n(1-ẟ) ≥ π(Pc) →1/n(1-ẟ)≥ 1
* 1 ≥ n(1-ẟ)
* 1 ≥ n-nẟ
* nẟ≥n-1
* ẟ ≥n-1/n
Suppose there are n firms in this market. At the collusive price, the firms are symmetric, so they divide the profits equally between the whole industry, represented as π(Pc)/n.If and only if the profit of choosing deviate is greater than that of sticking to collude, i.e
* π(Pc)/n(1-ẟ) ≥ π(Pc)(Companies have no incentive to deviate unilaterally)
* Therefore, when 𝛿 ≥ 𝑛−1/𝑛 is the case, i.e. the firm has no incentive to deviate unilaterally, the cartel alliance will be stable. So as the number of firms increases, the more difficult it is for The Cartel to maintain stability.
As the number of firms in the market increases, so does the factor of the minimum discount required for collusion to succeed.
According to
neoclassical price-determination theory and
game theory
Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...
, the independence of suppliers forces prices to their minimum, increasing
efficiency
Efficiency is the often measurable ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without ...
and decreasing the price-determining ability of each individual firm.
However if all firms collude to increase prices, loss of sales will be minimized, as consumers lack alternative 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
Efficiency is the often measurable ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without ...
to society.
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.
One variation of this traditional theory is the theory of
kinked demand
The Kinked-Demand curve theory is an economic theory regarding oligopoly and monopolistic competition. Kinked demand was an initial attempt to explain sticky prices.
Theory
"Kinked" demand curves and traditional demand curves are similar in th ...
. 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, its rivals are unlikely to follow, as they would lose the sales gains that they would otherwise receive by holding prices at the previous level. Kinked demand potentially fosters
supra-competitive prices Supracompetitive pricing is pricing above what can be sustained in a competitive market. This may be indicative of a business that has a unique legal or competitive advantage or of anti-competitive behavior that has driven competition from the mar ...
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 is a model of competition used in economics, named after Joseph Louis François Bertrand (1822–1900). It describes interactions among firms (sellers) that set prices and their customers (buyers) that choose quantities at the p ...
.
Collusion may also occur in auction markets, where independent firms coordinate their bids (
bid rigging
Bid rigging is a fraudulent scheme in procurement auctions resulting in non-competitive bids and can be performed by corrupt officials, by firms in an orchestrated act of collusion, or between officials and firms. This form of collusion is illegal ...
).
Deviation
![Future collusive profits](https://upload.wikimedia.org/wikipedia/commons/0/07/Future_collusive_profits.jpg)
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.
[Sorenson. (2007). Credible collusion in multimarket oligopoly. Managerial and Decision Economics, 28(2), 115–128. https://doi.org/10.1002/mde.1314]
The principle of collusion: firms give up deviation gains in the short term in exchange for continued collusion in the future.
* Collusion occurs when companies place more emphasis on future profits
* Collusion is easier to sustain when the choice deviates from the maximum profit to be gained is lower (i.e. the penalty profit is lower) and the penalty is greater.
* Future collusive profits − future punishment profits ≥ current deviation profits − current collusive profits-collusion can sustain.
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
Mercy (Middle English, from Anglo-French ''merci'', from Medieval Latin ''merced-'', ''merces'', from Latin, "price paid, wages", from ''merc-'', ''merxi'' "merchandise") is benevolence, forgiveness, and kindness in a variety of ethical, relig ...
.
Indicators
Practices that suggest possible collusion may include one or more actions such as:
*
Uniform prices and setting of an unjustified high or an unjustified low price
*
Kickbacks
A kickback is a form of negotiated bribery in which a commission is paid to the bribe-taker in exchange for services rendered. Generally speaking, the remuneration (money, goods, or services handed over) is negotiated ahead of time. The kickback ...
and blanket referral agreements between competing businesses
*
Dividing territories
Dividing territories (also market division) is an agreement by two companies to stay out of each other's way and reduce competition in the agreed-upon territories. The process known as geographic market allocation is one of several anti-competitiv ...
and market allocation
*
Tying agreements and anticompetitive
Product bundling
In marketing, product bundling is offering several products or services for sale as one combined product or service package. It is a common feature in many imperfectly competitive product and service markets. Industries engaged in the practice ...
(although, not all product bundling is anticompetitive)
*
Refusal to deal
Though in general, each business may decide with whom they wish to transact, there are some situations when a refusal to deal may be considered an unlawful anti-competitive practice, if it prevents or reduces competition in a market. The unlawful ...
and
Exclusive dealing
In Economics and Law, exclusive dealing arises when a supplier entails the buyer by placing limitations on the rights of the buyer to choose what, who and where they deal. This is against the law in most countries which include the USA, Austra ...
*
Dumping (pricing policy)
Dumping, in economics, is a kind of injuring pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price below the normal price with an injuring effect. The objective of d ...
*
Vertical restraints Vertical restraints are competition restrictions in agreements between firms or individuals at different levels of the production and distribution process. Vertical restraints are to be distinguished from so-called "horizontal restraints", which are ...
*
Horizontal territorial allocation
Horizontal territorial allocation is an agreement among competitors at the same level of distribution of a product or service to solicit customers only within a certain geographic area. The competitors who agree to this type of arrangement will oft ...
*
Bid rigging
Bid rigging is a fraudulent scheme in procurement auctions resulting in non-competitive bids and can be performed by corrupt officials, by firms in an orchestrated act of collusion, or between officials and firms. This form of collusion is illegal ...
Examples
![Set higher prices](https://upload.wikimedia.org/wikipedia/commons/0/08/Set_higher_prices.jpg)
* In the example in the picture, the dots in Pc and Q represent competitive industry prices. If firms collude, they can limit production to Q2 and raise the price to P2. Collusion usually involves some form of agreement to seek a higher price.
*When companies discriminate, price collusion is less likely, so the discount factor needed to ensure stability must be increased. In such price competition, competitors use delivered pricing to discriminate in space, but this does not mean that firms using delivered pricing to discriminate cannot collude.
Collusion is illegal in the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
,
Canada
Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
and most of the
EU due to
antitrust
Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust l ...
laws, but implicit collusion in the form of
price leadership
Tacit collusion is a collusion between competitors, which do not explicitly exchange information and achieving an agreement about coordination of conduct. There are two types of tacit collusion - concerted action and conscious parallelism. In a ...
and tacit understandings still takes place. Several examples of collusion in the United States include:
*
Market division
Dividing territories (also market division) is an agreement by two companies to stay out of each other's way and reduce competition in the agreed-upon territories. The process known as geographic market allocation is one of several anti-competitiv ...
and
price-fixing
Price fixing is an anticompetitive 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 ...
among manufacturers of heavy
electrical
Electricity is the set of physical phenomena associated with the presence and motion of matter that has a property of electric charge. Electricity is related to magnetism, both being part of the phenomenon of electromagnetism, as described by ...
equipment in the 1960s, including
General Electric
General Electric Company (GE) is an American multinational conglomerate founded in 1892, and incorporated in New York state and headquartered in Boston. The company operated in sectors including healthcare, aviation, power, renewable energ ...
.
* An attempt by
Major League Baseball
Major League Baseball (MLB) is a professional baseball organization and the oldest major professional sports league in the world. MLB is composed of 30 total teams, divided equally between the National League (NL) and the American League (AL), ...
owners to
restrict players' salaries in the mid-1980s.
* The sharing of potential contract terms by
NBA
The National Basketball Association (NBA) is a professional basketball league in North America. The league is composed of 30 teams (29 in the United States and 1 in Canada) and is one of the major professional sports leagues in the United St ...
free agents in an effort to help a targeted franchise circumvent the salary cap.
* Price fixing within
food
Food is any substance consumed by an organism for nutritional support. Food is usually of plant, animal, or fungal origin, and contains essential nutrients, such as carbohydrates, fats, proteins, vitamins, or minerals. The substance is inge ...
manufacturers providing cafeteria food to
school
A school is an educational institution designed to provide learning spaces and learning environments for the teaching of students under the direction of teachers. Most countries have systems of formal education, which is sometimes compuls ...
s and the
military
A military, also known collectively as armed forces, is a heavily armed, highly organized force primarily intended for warfare. It is typically authorized and maintained by a sovereign state, with its members identifiable by their distinct ...
in 1993.
* Market division and output determination of livestock feed additive, called
lysine
Lysine (symbol Lys or K) is an α-amino acid that is a precursor to many proteins. It contains an α-amino group (which is in the protonated form under biological conditions), an α-carboxylic acid group (which is in the deprotonated −C ...
, by companies in the US,
Japan
Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the north ...
and
South Korea
South Korea, officially the Republic of Korea (ROK), is a country in East Asia, constituting the southern part of the Korea, Korean Peninsula and sharing a Korean Demilitarized Zone, land border with North Korea. Its western border is formed ...
in 1996,
Archer Daniels Midland
The Archer-Daniels-Midland Company, commonly known as ADM, is an American multinational food processing and commodities trading corporation founded in 1902 and headquartered in Chicago, Illinois. The company operates more than 270 plants and 42 ...
being the most notable of these.
*
Chip dumping in
poker
Poker is a family of comparing card games in which players wager over which hand is best according to that specific game's rules. It is played worldwide, however in some places the rules may vary. While the earliest known form of the game w ...
or any other card game played for money.
*
Ben and Jerry's
Ben & Jerry's Homemade Holdings Inc., trading and commonly known as Ben & Jerry's, is an American company that manufactures ice cream, frozen yogurt, and sorbet. Founded in 1978 in Burlington, Vermont, the company went from a single ice cream p ...
and
Häagen-Dazs
Häagen-Dazs ( , ) is an American ice cream brand, established by Reuben and Rose Mattus in The Bronx, New York, in 1960. Starting with only three flavors: vanilla, chocolate, and coffee, the company opened its first retail store in Brooklyn, Ne ...
collusion of products in 2013: Ben and Jerry's makes chunkier flavors with more treats in them, while Häagen-Dazs sticks to smoother flavors.
* Google and Apple against employee poaching, a collusion case in 2015 wherein it was revealed that both companies agreed not to hire employees from one another in order to halt the rise in wages.
In the EU:
* The illegal collusion between the giant German automakers BMW, Daimler and Volkswagen, discovered by the
European Commission
The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body o ...
in 2019, to hinder technological progress in improving the quality of vehicle emissions in order to reduce the cost of production and maximize profits.
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 pricing
Risk-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. The interest rate on a ...
, 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
industry
Industry may refer to:
Economics
* Industry (economics), a generally categorized branch of economic activity
* Industry (manufacturing), a specific branch of economic activity, typically in factories with machinery
* The wider industrial sector ...
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. Firms generally prefer to produce at a level where marginal cost meets marginal revenue, if one firm can produce at a lower cost, it will prefer to produce more units, and would receive a larger share of profits than its partner in the agreement.
*Asymmetry of information: Colluding firms may not have all the correct information about all other firms, from a quantitative perspective (firms may not know all other firms' cost and demand conditions) or a qualitative perspective (moral hazard). In either situation, firms may not know each others' preferences or actions, and any discrepancy would incentive at least one actor to renege.
* Cheating: There is considerable incentive to cheat on collusion agreements; although lowering prices might trigger
price wars
A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...
, 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 from entering the market).
* Economic recession: An increase in average total cost or a decrease in revenue provides the incentive to compete with rival firms in order to secure a larger market share and increased demand.
* Anti-collusion legal framework and
collusive lawsuit
A collusive lawsuit or collusive action 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.
Examples
Constitutional law
For example, if two peopl ...
. Many countries with anti-collusion laws outlaw side-payments, which are an indication of collusion as firms pay each other to incentivize the continuation of the collusive relationship, may see less collusion as firms will likely prefer situations where profits are distributed towards themselves rather than the combined venture.
Government policies to reduce collusion
Collusion is when multiple companies reach an agreement to increase prices and profitability, at the expense of consumers. So the government is trying to prevent this from happening, such as the following policies:
* Fines for companies convicted of collusion.
* Fines and imprisonment for company executives who are personally liable.
* Detect collusion by screening markets for suspicious pricing activity and high profitability.
* Provide immunity to the first company to confess and provide the government with information about the collusion.
See also
*
Conscious parallelism
*
Corporate crime
In criminology, corporate crime refers to crimes committed either by a corporation (i.e., a business entity having a separate legal personality from the natural persons that manage its activities), or by individuals acting on behalf of a corpor ...
References
General references
* Vives, X. (1999) ''Oligopoly pricing'',
MIT Press
The MIT Press is a university press affiliated with the Massachusetts Institute of Technology (MIT) in Cambridge, Massachusetts (United States). It was established in 1962.
History
The MIT Press traces its origins back to 1926 when MIT publish ...
, Cambridge MA (readable; suitable for advanced undergraduates.)
*
Tirole, J. (1988) ''The Theory of Industrial Organization'', MIT Press, Cambridge MA (An organized introduction to industrial organization)
*
Tirole, J. (1986), "Hierarchies and Bureaucracies", Journal of Law Economics and Organization, vol. 2, pp. 181–214.
*
Tirole, J. (1992), "Collusion and the Theory of Organizations", Advances in Economic Theory: Proceedings of the Sixth World Congress of the Econometric Society, ed by J.-J. Laffont. Cambridge: Cambridge University Press, vol.2:151-206.
Inline citations
{{Authority control
Anti-competitive practices
Game theory
Bidding strategy