Collusion

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Definition of Collusion:

Collusion occurs when two or more competitors agree to reduce competition by collaborating to set prices, reduce output, or divide the market.

Detailed Explanation:

In an efficient market, businesses act independently and compete with each other to efficiently produce a good or service demanded by consumers and sell it at the market price. The law of supply and demand establishes the market price and socially optimal production level. Collusion disrupts an efficient market by pushing up prices and reducing output. Companies benefit from reducing competition by conspiring to raise prices, reduce output, or divide the market among themselves. Collusion is easiest when there are only a few companies in an industry. It is most common among oligopolies because oligopolies have a few dominant companies. Companies are interdependent in an oligopoly because management considers their competition’s probable response before reaching a decision. For example, management may hesitate to lower its price to gain market share if it fears it will start a price war. How can a price war be avoided? Collusion. But collusion is usually illegal – especially when it undermines an industry’s competitiveness. 

Antitrust laws prohibit discussing pricing or production quotas between competitors. That has not stopped many companies from colluding. Apple was accused of conspiring with publishers to increase the price of e-books. Westinghouse and GE were found guilty of colluding to fix prices of heavy electrical equipment in the 1960s. Roche tried to fix the prices of vitamins in the 1990s. Major league baseball owners were guilty of collaborating to restrain the escalation of wages for the league’s best players between 1985 and 1987 when owners agreed not to compete for players entering free agency. All-stars like Kirk Gibson, Ron Guidry, Tim Raines, and Doyle Alexander signed with their former team because no other owners expressed interest in their services. Michael Andreas, the vice-chairman of Archer Daniels Midland, was imprisoned in 1999 for price-fixing lysine, an animal feed additive. (Mr. Andreas was released from prison in 2002.) 

Dig Deeper With These Free Lessons:

Market Structures Part II – Monopolistic Competition and Oligopoly
Market Structures Part I – Perfect Competition and Monopoly
Output and Profit Maximization
Supply and Demand – Producers and Consumers Reach Agreement