Collusion is a non-competitive, secret, and sometimes illegal agreement between rivals aimed at disrupting the market’s equilibrium. The act of collusion involves people or companies, which typically compete against one another, conspiring together to gain an unfair market advantage. The colluding parties may collectively influence the market supply of a good or agree to a specific pricing level to maximize their profits at the expense of other competitors. It is commonly seen among duopolies.
Key Takeaways
- Collusion occurs when entities or individuals work together to influence a market or pricing for their advantage.
- Acts of collusion include price fixing, synchronized advertising, and sharing insider information.
- Antitrust and whistleblower laws help to deter collusion.
Types of Collusion Explained
Collusion can take many forms across different market types. In each scenario, groups collectively obtain an unfair advantage. One of the most common ways of colluding is price fixing. Price fixing occurs when a small number of companies, commonly referred to as an oligopoly, dominate a supply marketplace. This limited number of businesses offer the same product and form an agreement to set the price level. Prices may be forcibly lowered to drive out smaller competitors or inflated to support the group’s interests at a disadvantage to the buyer. Overall, price fixing reduces competition and raises barriers for new entrants.
Collusion may also happen when companies synchronize their advertising campaigns. In this case, partnering businesses may limit consumers’ knowledge about a product or service for an added advantage.
In the financial industry, collusion can also occur through the use of insider information. Colluding groups may gain several advantages by sharing private or preliminary information. This financial collusion allows parties to enter and exit trades before the shared information becomes publicly available.
Factors That Deter Collusion
In the United States, collusion is an illegal practice, which significantly deters its use. Antitrust laws aim to prevent collusion between companies, complicating the coordination and execution of collusion agreements. Further, in industries with strict supervision, engaging in collusion is challenging.
Defection is another key deterrent of collusion. A company agreeing to collude may later defect, undercutting the profits of the remaining members. Additionally, the company that defects may act as a whistleblower, reporting the collusion to relevant authorities.
Real World Example
In 2015, a New York appeals court upheld a 2013 ruling against tech behemoth Apple. The company had illegally conspired with five of the biggest book publishers on ebook pricing. The court found in favor of the plaintiffs. Apple’s goals were to promote its new iPad and to prevent Amazon from undercutting its ebook prices. The case led to a $450 million settlement in which Apple paid purchasers twice their losses.
Related Terms: oligopoly, duopoly, insider information, whistleblower, antitrust.
