This is a concerted practice between two or more competitors to carry out various actions that will result in the limiting of competition and a rise in profits. Such activities include setting sale, purchase and other market conditions, interfering with the results of bids among others.
In economy, collusion is seen as the agreement made between companies belonging to the same industry with a purpose of coordinating actions which allow them to grow stronger and challenge the growth possibilities of the rest. For example, two companies may come to an understanding that each one would control a section of the market through means such as monopolistic practices to prevent market access by new players.
A Little More on Collusion
Collusion agreements are either explicit or tacit. In the case of an explicit, the firms have an explicit agreement and do communicate with each other. In the case of tacit, the firms do not have an agreement and don’t interact with each other, but they coordinate their actions and recognize their strategic interdependence.
This means that they know the effects on the rest of the companies that emanate from their actions and they act with full knowledge to limit the competition. According to most competition Authorities, collusion is one of the most significant violations of the Competition Law. As a result, plenty of resources are usually allocated by these authorities in the investigation and punishment of such abuses.
Nevertheless, proving the existence of collusion is very difficult. People who participate in collusion know its illegality, and they put in place serious measures to hide any evidence. Usually, these participants meet secretly and destroy any incriminating evidence.
References for Collusion
Academic Research on Collusion
- Collusion over the business cycle, Bagwell, K., & Staiger, R. W. (1995). (No. w5056). National Bureau of Economic Research. This paper adopts a business cycle model in which market demand keeps alternating stochastically between boom and recession phases to present a theory of collusive pricing that is subject to the business cycle fluctuations.
Small business ethics: Influences and perceptions, Brown, D. J., & King, J. B. (1982). Journal of Small Business Management (pre-1986), 20(000001), 11. This paper attempts to examine how small businesses perceive ethics and the extent to which they influence their day to day activities.
Collusion with capacity constraints over the business cycle, Fabra, N. (2006). International Journal of Industrial Organization, 24(1), 69-81. In this paper, an investigation is performed on the effects that capacity constraints have on the sustainability of collusion in markets subject to cyclical demand fluctuations.
Collusion in the Dutch construction industry: an industrial organization perspective, Dorée, A. G. (2004). Building Research & Information, 32(2), 146-156. This paper presents the results of numerous investigations that have been carried out by the parliament, cabinet and antitrust authorities which show that there is continuous use of cartels and structural bid rigging in the construction industry.
Rules, communication, and collusion: Narrative evidence from the Sugar Institute case, Genesove, D., & Mullin, W. P. (2001). American Economic Review, 91(3), 379-398. This article presents detailed notes of meetings held by sugar-refining cartels which show how communication aids firms in colluding and it also presents the deficiencies in the existing formal theory of collusion.
Business, the state, and economic performance in developing countries, Schneider, B. R., & Maxfield, S. (1997). Business and the State in developing countries, 17. This paper follows the state of business and economic performance in developing countries.
Business collusion as a criminological phenomenon: Exploring the global criminalization of business cartels, Harding, C. (2006). Critical Criminology, 14(2), 181-205. This paper provides an account of the process of criminalization and maps it in terms of jurisdiction and the legal character of cartel offending.
Collusion and predation under (almost) free entry, Harrington Jr, J. E. (1989). International Journal of Industrial Organization, 7(3), 381-401. This article presents an investigation of the degree of cooperation that firms are willing to support when there is a lack of significant barriers to entry.
A theory of cooperation in international business, Casson, M. (1989). In The multinational enterprise (pp. 46-74). Palgrave Macmillan, London. This study fudges the extent to which cooperative ventures are cooperative even though it is possible to regard these ventures as cooperative by definition.
Using relative profit incentives to prevent collusion, Lundgren, C. (1996). Review of Industrial Organization, 11(4), 533-550. This paper discusses a new economic method that prevents oligopoly collusion by making managerial compensation depend on the relative profits instead of absolute profits.
Cartels, collusion, and horizontal merger, Jacqueline, A., & Slade, M. E. (1989). Handbook of industrial organization, 1, 415-473. In this paper, the principal theoretical and practical problems of cartel economics, collusion and horizontal mergers are discussed in depth.
The theory of business strategy, Shapiro, C. (1989). The Rand journal of economics, 20(1), 125-137. This article presents a participant’s view of what was learnt by industrial organization economists from the theoretical research and the direction that should have been taken by the industrial organization during the 1990s.