Collusion: Difference between revisions
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<onlyinclude>'''Collusion''' | <onlyinclude>'''Collusion''' describes when two or more firms informally agree not to compete with each other or to limit the introduction of new competitors into the [[market]].</onlyinclude><ref name=Ox_econ>"A Dictionary of Economics" published Oxford University Press, 2013. Edited by John Black, Nigar Hashimzade, and Gareth Myles Online version accessed [August 17th, 2017].</ref> These agreements are informal (not contractual) and they are used to get around [[anti-trust legislation]] that is designed to ensure fair competition in a [[market]].<ref>J.Black, N. Hashimzade, and G. Myles. (2009) "Collusion." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-450?rskey=8aTbVQ&result=1 , 2009 [June 28, 2016]</ref> When firms collude, they typically agree to raise prices, restrict [[supply]] or share information that would normally be used to gain an advantage over the other firm(s).<ref>Investopedia. "Collusion." [Online], Available: http://www.investopedia.com/terms/c/collusion.asp [June 28, 2016].</ref> | ||
==Collusion in Practice== | ==Collusion in Practice== | ||
For collusion to take place there has to be anti-trust legislation that prohibits the formation of these agreements. The existence of anti-trust legislation forces agreements to be informal and secret. Sometimes there is no communication between firms but a group of firms will all sell for the same price to achieve the same effect. Firms might also deliberately avoid undercutting a competitor to achieve the same effect without making an agreement, this is called '''tacit collusion'''.<ref>E. J. Green, R. C. Marshall, and L. M. Marx. ''Tacit Collusion in Oligopoly''. Durham: Fuqua School of Business, Duke University, 2013, pp. 2.</ref> | For collusion in particular to take place, there has to be [[anti-trust legislation]] that prohibits the formation of these agreements. The existence of anti-trust legislation forces agreements to be ''informal'' and ''secret''. Sometimes there is no communication between firms but a group of firms will all sell for the same price to achieve the same effect. Firms might also deliberately avoid undercutting a competitor to achieve the same effect without making an agreement, this is called '''tacit collusion'''.<ref>E. J. Green, R. C. Marshall, and L. M. Marx. ''Tacit Collusion in Oligopoly''. Durham: Fuqua School of Business, Duke University, 2013, pp. 2.</ref> | ||
Collusion is the central idea behind an [[oligopoly]] or [[oligopsony]]. | Collusion is the central idea behind an [[oligopoly]] or [[oligopsony]]. For example, three firms in competition sell the same good for three different prices, each is slightly lower than the other. But, if they agree to collude, then all three firms can raise their price to the highest level. With collusion, the firms can raise prices because they do not have to worry about another firm undercutting their good by selling it at a lower price. On the other hand, firms can also agree to drop their prices to prevent new competition from entering the market. The three firms would drop their prices to keep firms with higher production costs out of the market, as those firms would have to sell at a higher price. The aim of a collusion syndicate or [[cartel]] is to gain the [[market power]], meaning the firms can influence the price or quantity supplied in the market. | ||
In an oligopoly the restraint placed on either the price or supply means that the market is kept from achieving an efficient equilibrium. This creates an inefficiency in the market and a [[deadweight loss]]. | In an [[oligopoly]] the restraint placed on either the price or supply means that the market is kept from achieving an ''efficient equilibrium''. This creates an inefficiency in the market and a [[deadweight loss]]. | ||
==Examples of Collusion== | ==Examples of Collusion== | ||
The [[Organization of petroleum exporting countries]] (OPEC) is an example of firms and governments colluding to gain control of the market for [[crude oil]] and create a higher, more stable price. | [[File:OPEC Basket Price.webp.png|thumb|450x450px|Figure 1. The OPEC Reference Basket is a weighted average of oil prices from various OPEC member countries.<ref>Wikimedia Commons (2022). (Accessed July 15, 2026). ''OPEC Basket Price'' [Online]. Available: https://commons.wikimedia.org/wiki/File:OPEC_Basket_Price.webp</ref><ref>OPEC (2026). (Accessed July 15, 2026). ''OPEC Basket Price'' [Online]. Available: https://www.opec.org/opec-basket-price.html</ref>]] | ||
The [[Organization of petroleum exporting countries]] (OPEC) is an example of firms and governments colluding to gain control of the market for [[crude oil]] and create a higher, more stable price. The OPEC basket price (see Figure 1) serves as a benchmark for global oil prices. | |||
In the 1980s, Major League Baseball teams colluded to limit the amount of salary that would be offered to players. This saved teams money and limited the amount of competition in the market for payers because teams can incentivize better players with higher salaries. | |||
== | ==For Further Reading== | ||
*[[Oligopoly]] | *[[Oligopoly]] | ||
*[[Oligopsony]] | *[[Oligopsony]] | ||
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*[[Organization of Petroleum Exporting Countries]] | *[[Organization of Petroleum Exporting Countries]] | ||
*[[Cartel]] | *[[Cartel]] | ||
*Or explore a [[Special:Random|random page]] | |||
==References== | ==References== | ||
{{reflist}} | {{reflist}} | ||
[[Category: Uploaded]] | |||
Revision as of 19:39, 15 July 2026
Collusion describes when two or more firms informally agree not to compete with each other or to limit the introduction of new competitors into the market.[1] These agreements are informal (not contractual) and they are used to get around anti-trust legislation that is designed to ensure fair competition in a market.[2] When firms collude, they typically agree to raise prices, restrict supply or share information that would normally be used to gain an advantage over the other firm(s).[3]
Collusion in Practice
For collusion in particular to take place, there has to be anti-trust legislation that prohibits the formation of these agreements. The existence of anti-trust legislation forces agreements to be informal and secret. Sometimes there is no communication between firms but a group of firms will all sell for the same price to achieve the same effect. Firms might also deliberately avoid undercutting a competitor to achieve the same effect without making an agreement, this is called tacit collusion.[4]
Collusion is the central idea behind an oligopoly or oligopsony. For example, three firms in competition sell the same good for three different prices, each is slightly lower than the other. But, if they agree to collude, then all three firms can raise their price to the highest level. With collusion, the firms can raise prices because they do not have to worry about another firm undercutting their good by selling it at a lower price. On the other hand, firms can also agree to drop their prices to prevent new competition from entering the market. The three firms would drop their prices to keep firms with higher production costs out of the market, as those firms would have to sell at a higher price. The aim of a collusion syndicate or cartel is to gain the market power, meaning the firms can influence the price or quantity supplied in the market.
In an oligopoly the restraint placed on either the price or supply means that the market is kept from achieving an efficient equilibrium. This creates an inefficiency in the market and a deadweight loss.
Examples of Collusion
The Organization of petroleum exporting countries (OPEC) is an example of firms and governments colluding to gain control of the market for crude oil and create a higher, more stable price. The OPEC basket price (see Figure 1) serves as a benchmark for global oil prices.
In the 1980s, Major League Baseball teams colluded to limit the amount of salary that would be offered to players. This saved teams money and limited the amount of competition in the market for payers because teams can incentivize better players with higher salaries.
For Further Reading
- Oligopoly
- Oligopsony
- Deadweight loss
- Anti-trust legislation
- Organization of Petroleum Exporting Countries
- Cartel
- Or explore a random page
References
- ↑ "A Dictionary of Economics" published Oxford University Press, 2013. Edited by John Black, Nigar Hashimzade, and Gareth Myles Online version accessed [August 17th, 2017].
- ↑ J.Black, N. Hashimzade, and G. Myles. (2009) "Collusion." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-450?rskey=8aTbVQ&result=1 , 2009 [June 28, 2016]
- ↑ Investopedia. "Collusion." [Online], Available: http://www.investopedia.com/terms/c/collusion.asp [June 28, 2016].
- ↑ E. J. Green, R. C. Marshall, and L. M. Marx. Tacit Collusion in Oligopoly. Durham: Fuqua School of Business, Duke University, 2013, pp. 2.
- ↑ Wikimedia Commons (2022). (Accessed July 15, 2026). OPEC Basket Price [Online]. Available: https://commons.wikimedia.org/wiki/File:OPEC_Basket_Price.webp
- ↑ OPEC (2026). (Accessed July 15, 2026). OPEC Basket Price [Online]. Available: https://www.opec.org/opec-basket-price.html
