Collusion is a type of secretive agreement that occurs between two parties who represent an organization, most often a company or office of government. Collusion involves misleading or deceiving a third party, including consumers, competitors, and other parties involved in negotiations. The goal is usually to gain a market advantage by offering set prices, limiting production, or limiting opportunities. Collusion can take a variety of forms. Some common examples include fixing wages of employees, issuing and receiving kickbacks, or pretending to operate as two independent parties when actually collaborating.

Types of Collusion

There are two main types of collusion:

  • Explicit Collusion: occurs when two companies or firms involved in the same industry agree to somehow control the market. This type of agreement is likely to be highly secretive and may not involve any documentation since collusion is illegal in the United States. The agreement may happen at a business meeting, conference, or casual dinner between company presidents or executives. It is considered explicit because it is discussed by both parties.
  • Implicit Collusion: is a slightly less overt agreement between two parties in the same industry. It is considered an informal agreement, as implicit collusion may never be discussed outright by company or firm executives. Nonetheless, parties become interdependent, with one company taking the lead by setting a higher price for a product or service and other companies following suit, knowing that everyone involved will benefit from doing so.

Indications of Collusion

It can be difficult to identify collusion between two parties, especially if it is implicit. A competitive market also means that prices for similar products or services may appear similar. However, prices for similar products from different providers that rise around the same time may be evidence of collaboration. Exchange of information between two firms or companies that should be competing is also a sign.

Examples

Collusion can occur in a wide variety of settings. The most common example occurs between two companies that compete to sell a similar product. Competition should drive the price of the product down. However, if these companies secretly work together to either raise the market price or limit the supply of the product, they are effectively forcing consumers to pay more for it by collaborating instead of competing. Meanwhile, both companies benefit by increasing their own margin for profit. This is considered collusion and it is illegal in the United States; however, it can take a number of other forms. Collusion may occur between parties in a legal setting, between stock market traders, or between city officials and construction companies.

Quick Summary

Collusion occurs when two individuals, firms, or companies collaborate to reduce competition in a market for a good, product, or service. It can take a variety of forms and occur in a wide number of settings, from the business world to the stock market. There are two main types of collusion: explicit and implicit. While explicit involves an overt exchange of information, it can still be difficult to trace because agreements are often secretive. Implicit collusion occurs when involved parties react to price adjustments without discussing it.