Collusion

Definition of "Collusion"

Written by

John Donahue &
Howard Simon

HomeStarr Realty

The term collusion may make you think about colluding from the start, and you wouldn’t be far from the truth. The definition of collusion is a secret, non-competitive, and, at times, illegal agreement between two or more rivals that aim to destabilize the market’s balance. 

Collusion can be done by people, companies, or other entities that generally go against each other. However, instead of doing what they normally should, they collude in order to gain an unfair advantage in the market. The reason for collusion is to influence the supply of a good or service within the market or set a common price that will help their partners’ profits but unfairly impact the competitors. Collusion can be commonly encountered in duopolies.

Types of Collusion

As mentioned before, collusion occurs when more than one rival entity agrees on a set of norms to obtain an unfair advantage collectively. Collusion can take more than one form and can happen in different types of markets. 

The most common type of collusion is price-fixing. While price-fixing involves a small number of companies that offer the same product, if they form an agreement on a specific price level, they can drive out competitors if they all lower the price at the same time. Aside from this, price-fixing can also make it incredibly difficult for any new company to enter the market.

If companies synchronize their advertising campaigns, it can also be collusion. By synchronizing their advertising campaigns, companies can limit the information given to the consumer or clients about their products or services.

The use of insider information is another form of collusion that can be encountered in the financial industry. If groups of colluding companies share private or preliminary information, they can gain several advantages in advance while the rest of the market has to wait. When the information is made public, the other companies are barely starting to plan their next move, while the colluding group has all their homework done ready to be graded. This type of collusion makes it easier for colluding partners to enter or exit trades when it comes to the stock market, and we can all understand how dangerous it can be.

What stops Collusion?

As the United States considers collusion to be an illegal practice, antitrust laws are set in place to regulate any misconduct. This is just one method of preventing collusion and other illicit practices. Some industries have their own types of strict supervision, making it even more difficult to partake in collusion. The most “amusing” deterrent to collusion is defection. This can happen if a company that initially agrees to participate in collusion decides to back out and undercut the profits of the other partners. That company can also become a whistleblower and call the appropriate authorities with a full report on the collusion that took place or is still taking place.