Negative Effects of Collusion in Business and Politics

While most companies caught and convicted of price fixing are small firms, a couple of powerhouse companies joined forces in the 1950s to manipulate the market in industrial electrical equipment. Those products included steam turbine generators, transformers, and switchgears, among others. 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 what is a collusion pricing, market allocation, sales quotas, etc.

Smaller companies providing the same products within the same industry lack the power to influence the prices. However, it is very difficult to prove that companies are engaging in tacit collusion deliberately, since most of them are in oligopolistic markets and never overtly disclose such agreements, such as the airline industry. These agreements are generally secret, and the participants defraud customers by holding themselves out as competitors despite their agreement not to compete. They harm consumers and taxpayers by causing them to pay more for products and services and by depriving them of other byproducts of true competition.

How to prevent collusions and Keep markets fair

Successful companies would often reward rivals with a secret payment for avoiding competition. 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. Yes, collusion is generally illegal under antitrust laws in most countries.

Game theory and collusion

Monopolies are able to extract optimum revenue by offering fewer units at a higher cost. An oligopoly where each firm acts independently tends toward equilibrium at the ideal, but such covert cooperation as price leadership tends toward higher profitability for all, though it is an unstable arrangement. Collusion typically involves secrecy and cooperation between businesses to manipulate the market. It often results in higher prices and less choice for consumers, and it usually happens between companies that should be competing with each other. When everyone has access to the same information, it’s harder for companies to pull off secret deals. Open markets where prices and other details are out in the open make it tough for collusion to thrive.

Other Forms of Collusion

Fortunately, various forms of government intervention can be taken to reduce collusion among firms and promote natural market competition. Tacit collusion occurs when market players allow price changes to be set by a dominant company. The leading company exerts an influence that determines the pricing of commodities and services in the industry. They use things like data analysis to watch for unusual pricing patterns or sudden changes in how companies are behaving. If prices stay the same for too long, or if companies all raise their prices at the same time for no obvious reason, it could be a sign that something fishy is going on. Instead of trying to beat each other by offering better deals, they all keep their prices high, knowing that customers don’t have any better options.

1. These laws are designed to protect competition and ensure that markets remain fair for consumers.
2. "It requires that all the bidders reach an implicit agreement about who should get what. With thirty diverse bidders unable to communicate about strategy except through their bids, forming such unanimous agreement is difficult at best."
3. For example, the European Commission once fined several major car manufacturers for colluding to delay the introduction of cleaner car technologies.
4. If you're not aware of the risks, you may unknowingly become involved in collusion, and could be accused of academic dishonesty.
5. Let’s break down what collusion is, the different ways it can happen, and why it’s a big deal.

Antitrust laws aim to prevent companies from engaging in collusion by making it harder for companies to navigate and implement a colluding agreement. Industries with strict regulations may make it difficult for other companies to collude with other entities. In the financial markets, colluding partners may agree to share insider information and gain a trading advantage. Financial market collusion may allow the colluding entities to enter and exit the market before the secret information is available publicly. Classical economic theory holds that Pareto efficiency is attained at a price equal to the incremental cost of producing additional units.

They might watch each other and adjust their prices or production levels based on what the others are doing, all without saying a word. It’s like everyone knows the dance steps, even though no one talks about the choreography. Overt collusion is pretty straightforward—well, as much as something secret can be.