Collusion

3 key takeaways

• Collusion involves secretive cooperation between competitors to limit competition and manipulate market outcomes.
• Common forms of collusion include price fixing, market sharing, bid rigging, and production limitations.
• Collusion is illegal in many jurisdictions because it undermines free market competition and harms consumers.

What is collusion?

Collusion occurs when businesses or individuals conspire to influence market conditions to their advantage, often at the expense of competitors and consumers. These agreements are typically hidden from the public and regulatory authorities because they are intended to manipulate the market and reduce competition. By colluding, companies can set higher prices, limit supply, or divide markets among themselves, which can lead to higher profits for the colluding parties and detrimental effects for consumers and the economy.

Key forms of collusion:

• Price Fixing: Competitors agree to set prices at a certain level rather than allowing market forces to determine them. This can lead to artificially high prices.
• Market Sharing: Competitors divide the market among themselves, agreeing not to compete in certain areas or for certain customers.
• Bid Rigging: Companies collude to influence the outcome of competitive bidding processes, ensuring that a particular party wins the bid.
• Production Limitation: Competitors agree to limit the production or supply of goods to maintain high prices or prevent market saturation.

Example:

If two major airlines secretly agree to set their ticket prices at the same high level, they are engaging in price fixing. This reduces competition and leads to higher prices for consumers.

Importance of addressing collusion

• Market Integrity: Ensuring that markets operate fairly and competitively, without manipulation, is crucial for economic health.
• Consumer Protection: Preventing collusion protects consumers from artificially high prices and limited choices.
• Economic Efficiency: Competitive markets drive efficiency, innovation, and better resource allocation, which collusion undermines.

Advantages and disadvantages of collusion

Advantages (for colluding parties):

• Increased Profits: Colluding parties can maintain higher prices and profits than they would in a competitive market.
• Market Control: Allows colluding companies to exert more control over the market, reducing uncertainties and competitive pressures.
• Stability: Reduces the competitive volatility in the market, providing more predictable outcomes for the colluding entities.

Disadvantages:

• Illegality and Penalties: Collusion is illegal in many jurisdictions, and parties caught colluding face significant fines, legal penalties, and reputational damage.
• Consumer Harm: Leads to higher prices, reduced choices, and potentially lower quality for consumers.
• Economic Inefficiency: Distorts market dynamics, leading to inefficient resource allocation and stifling innovation and competition.

Real-world application

Collusion is addressed through various legal and regulatory frameworks designed to maintain fair competition:

• Antitrust Laws: Legislation such as the Sherman Act in the United States and the Competition Act in the UK aim to prevent anti-competitive practices, including collusion.
• Regulatory Authorities: Agencies like the Federal Trade Commission (FTC) in the US and the Competition and Markets Authority (CMA) in the UK investigate and enforce laws against collusion.
• Whistleblowing: Encouraging individuals to report collusive practices can help uncover and address anti-competitive behavior.

Historical Examples:

• Airline Industry: Several airlines have been fined for colluding on fuel surcharges and ticket prices.
• Construction Industry: Instances of bid rigging in public construction contracts have led to significant legal actions and fines.

Related topics

• Antitrust laws
• Price fixing
• Market sharing
• Bid rigging
• Competition policy
• Monopolies and oligopolies

Understanding collusion and its impact on markets is essential for recognizing the importance of maintaining competitive integrity. By addressing and preventing collusive practices, regulatory authorities help ensure that markets function efficiently, benefiting consumers and the economy as a whole.