Collusion

Competitors do not always need a written agreement to stop competing. Sometimes they simply read each other's moves and quietly cooperate, which is the subtler face of collusion.

Collusion is cooperation among competing firms to limit competition and raise their joint profits, by coordinating on prices, output, or market shares. It ranges from explicit, secret agreements, cartels, to tacit understandings reached without any communication at all, and it is a central concern of competition policy because it deprives customers of the benefits of rivalry.

Explicit and tacit

Collusion comes in two forms that differ sharply in detectability. Explicit collusion involves direct agreement among firms to fix prices or divide markets, the cartel, which is clearly illegal where it can be proven. Tacit collusion involves firms coordinating their behaviour without any explicit agreement, simply by recognising their mutual interest in not competing too hard and adjusting their conduct accordingly. In a concentrated market, firms can learn to avoid price wars and sustain high prices just by observing and anticipating each other, no meeting or message required.

The pull toward cooperation

Collusion is tempting in oligopoly because competition, especially price competition, erodes everyone's profits, while restraint preserves them. Firms in a concentrated market quickly grasp that aggressive price-cutting invites retaliation and leaves everyone worse off, and that mutual forbearance keeps prices and profits high. This shared interest creates a constant gravitational pull toward coordination, whether or not it is ever made explicit, which is why concentrated industries are watched closely even absent any proof of agreement.

The problem for the law

Tacit collusion poses a deep difficulty for competition policy. Explicit collusion can be attacked as an illegal agreement, but tacit coordination involves no agreement to prohibit, only firms independently recognising their interdependence and acting on it, which is hard to distinguish from normal competitive behaviour and hard to outlaw without forbidding firms from simply being aware of their rivals. This is why competition authorities focus heavily on market structure, watching mergers and concentration that would make tacit collusion easier, rather than relying solely on catching explicit conspiracies.

Collusion, in its explicit and tacit forms, is the way competitors escape the rigours of competition to their customers' cost, whether by secret agreement or by quiet mutual understanding. Its tacit variety is among the hardest problems in competition policy, because it can produce the harms of a cartel through nothing more than the shared recognition, by a few firms, that competing less serves them all.