Collusion

Collusion is a secret cooperation or deceitful agreement in order to deceive others, although not necessarily illegal, as 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. Collusion is a secret cooperation or deceitful agreement in order to deceive others, although not necessarily illegal, as 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. However, if firms collude to all increase prices, loss of sales is minimized, as consumers lack alternative choices at lower prices. This benefits the colluding firms at the cost of efficiency to society. 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.