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Collusion is a secret cooperation or deceitful agreement in order to deceive others, although not necessarily illegal, as is a conspiracy. A secret agreement between two or more parties 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 market advantage is an example of collusion. 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.
In the study of economics 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. Collusion which is covert, on the other hand, is known as tacit collusion, and is legal. Adam Smith in the Wealth of Nations explains that since the masters (business owners) are fewer in numbers, it becomes much easier for them to collude in order to serve common interests among them, such as keeping the wages of workers low, while it is much more difficult for the labor to coordinate in order to protect their own interests due to their vast numbers. Therefore, business owners have a bigger advantage over the working class. Nevertheless, according to Adam Smith, people rarely hear about the coordination and collaboration that happens between business owners as it happens in an informal way.
According to neoclassical price-determination theory and game theory, the independence of suppliers forces prices to their minimum, increasing efficiency and decreasing the price determining ability of each individual firm.[ citation needed ] However, if firms collude to all increase prices, loss of sales is minimized, as consumers lack alternative choices at lower prices.[ citation needed ] This benefits the colluding firms at the cost of efficiency to society.[ citation needed ]
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 are expected to follow suit in order to maintain sales; when one firm increases its price, however, 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.[ citation needed ]
Collusion may occur also in auction markets, where independent firms coordinate their bids (bid rigging).
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 environmentand the existence of leniency programs. Others, drawing upon the literature in criminology and misconduct, have suggested that firms conduct a costs/benefits analysis to assess their participation in collusion.
Practices that suggest possible collusion include:
Collusion is illegal in the United States, Canada and most of the EU due to antitrust laws, but implicit collusion in the form of price leadership and tacit understandings still takes place. Several examples of collusion in the United States include:
In the EU:
There are many ways that implicit collusion tends to develop:
There can be significant barriers to collusion. In any given industry, these may include:
Microeconomics is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly and duopoly which consists of a few sellers dominating a market. Monopolies are thus characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.
An oligopoly (ολιγοπώλιο) is a market form wherein a market or industry is dominated by a small group of large sellers (oligopolists). Oligopolies can result from various forms of collusion that reduce market competition which then typically leads to higher prices for consumers. Oligopolies have their own market structure.
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. Most jurisdictions consider it anti-competitive behavior. Cartel behavior includes price fixing, bid rigging, and reductions in output. The doctrine in economics that analyzes cartels is cartel theory. Cartels are distinguished from other forms of collusion or anti-competitive organization such as corporate mergers.
The imperfect competition is the situation of market failure in which, unlike the situation of perfect competition, the law of supply and demand is not freely used to determine prices, but in which there must be a balance in the prices determined.
Price 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.
Price points are prices at which demand for a given product is supposed to stay relatively high.
The following outline is provided as an overview of and topical guide to industrial organization:
Decartelization is the transition of a national economy from monopoly control by groups of large businesses, known as cartels, to a free market economy. This change rarely arises naturally, and is generally the result of regulation by a governing body with monopoly of power to decide what structures it likes.
In economics and particularly in industrial organization, market power is the ability of a firm to profitably raise the market price of a good or service over marginal cost. In perfectly competitive markets, market participants have no market power. A firm with total market power can raise prices without losing any customers to competitors. Market participants that have market power are therefore sometimes referred to as "price makers" or "price setters", while those without are sometimes called "price takers". Significant market power occurs when prices exceed marginal cost and long run average cost, so the firm makes economic profit.
Conscious parallelism is a term used in competition law to describe pricing strategies among competitors in an oligopoly that occurs without an actual agreement between the players. Instead, one competitor will take the lead in raising or lowering prices. The others will then follow suit, raising or lowering their prices by the same amount, with the understanding that greater profits result.
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 in most countries. It is a form of price fixing and market allocation, often practiced where contracts are determined by a call for bids, for example in the case of government construction contracts. The typical objective of bid rigging is to enable the "winning" party to obtain contracts at uncompetitive prices. The other parties are compensated in various ways, for example, by cash payments, or by being designated to be the "winning" bidder on other contracts, or by an arrangement where some parts of the successful bidder's contract will be subcontracted to them. In this way, they "share the spoils" among themselves. Bid rigging almost always results in economic harm to the agency which is seeking the bids, and to the public, who ultimately bear the costs as taxpayers or consumers.
An Edgeworth price cycle is cyclical pattern in prices characterized by an initial jump, which is then followed by a slower decline back towards the initial level. The term was introduced by Maskin and Tirole (1988) in a theoretical setting featuring two firms bidding sequentially and where the winner captures the full market.
In economics, market concentration is a function of the number of firms and their respective shares of the total production in a market. Alternative terms are industry concentration and seller concentration.
Jean Tirole is a French professor of economics. He focuses on industrial organization, game theory, banking and finance, and economics and psychology. In 2014 he was awarded the Nobel Memorial Prize in Economic Sciences for his analysis of market power and regulation.
Stephen W. Salant is an economist who has done extensive research in applied microeconomics. His 1975 model of speculative attacks in the gold market was adapted by Paul Krugman and others to explain speculative attacks in foreign exchange markets. Hundreds of journal articles and books on financial speculative attacks followed.
Tacit collusion occurs where firms choose actions that are likely to minimize a response from another firm, e.g. avoiding the opportunity to price cut an opposition because it would cause the opposition to retaliate. 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 unwritten rules of collusive behavior such as price leadership. A price leader will then emerge and it sets the general industry price, with other firms following suit. For example, see the case of British Salt Limited and New Cheshire Salt Works Limited.
The Kinked-Demand curve theory is an economic theory regarding oligopoly and monopolistic competition. Kinked demand was an initial attempt to explain sticky prices.
In economics, profit in the accounting sense of the excess of revenue over cost is the sum of two components: normal profit and economic profit. Understanding profit can be broken down into three aspects: the size of profit, the portion of the total income, and the rate of profit. Normal profit is the profit that is necessary to just cover the opportunity costs of an owner-manager or of a firm's investors. In the absence of this profit, these parties would withdraw their time and funds from the firm and use them to better advantage elsewhere. In contrast, economic profit, sometimes called excess profit, is profit in excess of what is required to cover the opportunity costs.
A Markov perfect equilibrium is an equilibrium concept in game theory. It has been used in analyses of industrial organization, macroeconomics, and political economy. It is a refinement of the concept of subgame perfect equilibrium to extensive form games for which a pay-off relevant state space can be identified. The term appeared in publications starting about 1988 in the work of economists Jean Tirole and Eric Maskin.