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collusionthe deliberate suppression of competition between themselves by a group of rival suppliers. Collusion may be confined to a single area of business activity for example prices, or cover a wider range of limitations including coordinated marketing, production and capacity adjustments. Collusion may be practised through formalized arrangements specifying obligations (either in writing or orally) and institutional mechanisms for coordinating behaviour, as in a CARTEL or ANTICOMPETITIVE AGREEMENT/ RESTRICTIVE TRADE AGREEMENT, or operated by more informal means through, for example, an INFORMATION AGREEMENT or CONCERTED PRACTICE.
The purpose of collusion may be to monopolize jointly the supply of a product in order to extract MONOPOLY profits, or it may be a defensive response to poor trading conditions, seeking to prevent prices from dropping to uneconomic levels. Because, however, of its generally adverse effects on market efficiency (cushioning inefficient, high-cost suppliers), and because it deprives buyers of the benefits of competition (particularly lower prices), collusion is usually prohibited outright, by COMPETITION POLICY, as in the UK, under the COMPETITION ACT 1998.
collusiona form of INTERFIRM CONDUCT pattern in which firms arrive at an agreement or ‘understanding’ covering their market actions. Successful collusion requires the acceptance of a common objective for all firms (for example, JOINT-PROFIT MAXIMIZATION) and the suppression of behaviour inconsistent with the achievement of this goal (for example, price competition). Collusion may be either overt or tacit. Overt collusion usually takes the form of either an express agreement in writing or an express oral agreement arrived at through direct consultation between the firms concerned. Alternatively, collusion may take the form of an ‘unspoken understanding’ arrived at through firms’ repeated experiences with each other's behaviour over time.
The purpose of collusion may be jointly to monopolize the supply of a product in order to extract MONOPOLY profits, or it may be a ‘defensive’ response to poor trading conditions, seeking to prevent prices from dropping to uneconomic levels. Because, however, of its generally adverse effects on market efficiency (cushioning inefficient, high-cost suppliers) and because it deprives buyers of the benefits of competition (particularly lower prices), collusion is either prohibited outright by COMPETITION POLICY or permitted to continue only in exceptional circumstances.
In the UK, under the COMPETITION ACT 1998, collusion in the form of an ANTICOMPETITIVE AGREEMENT/RESTRICTIVE TRADE AGREEMENT is prohibited outright. Previously, under the RESTRICTIVE TRADE PRACTICES ACT, such agreements were allowed to continue, providing ‘net economic benefit’ could be established. See CARTEL, RESTRICTIVE TRADE AGREEMENT, ANTICOMPETITIVE AGREEMENT, OLIGOPOLY, DUOPOLY, INFORMATION AGREEMENT, RESTRICTIVE PRACTICES COURT.