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Collusion – A Barrier to Competition

13 July 2009 - News - Editor

In the business world, collusion is an agreement between rival companies to collaborate to gain an unfair advantage in their particular market sector. Instead of competing, they work together to drive up profits. Although this is an illegal practice in most countries, with the United States, Canada and the majority of European Union member countries having antitrust and competition laws in place to prevent it, collusion nevertheless does take place. Depending on how many suppliers there are in a market sector, collusion generally takes the form of price fixing, where all parties agree to sell their products at the same price, but can also take the form of limiting production and supply and division of market share. Collusion is most often found in an industry where there is a duopoly, where only two companies are competing for the same market, or an oligopoly, where more than two but nevertheless a limited number of companies are competitors.

This anti-competitive practice does not allow the consumer to shop around for a better price, leaving them no choice but to pay the price if they want the product. Colluding companies can push prices up while seldom suffering loss of sales, because consumers have no alternative. Sometimes collusion takes place in an informal manner, where a market leader sets its price according to its marketing and management strategy, and others in the market follow. Also known as price leadership, or tacit collusion, this practice has a lesser impact on the market than collusion has, because all prices are not the same and consumers have a choice. However, if the market leader increases its prices, competitors will do likewise while remaining just below the market leader’s price.

Implicit collusion can gain a foothold through the practice of meetings of competitors in various industries. This could come about for various reasons, such as a specialized expo where participants will be exhibiting their products, resulting in a certain amount of strategic and pricing information being shared with competitors.

While there may be variations in different countries, competition and antitrust laws seek to prohibit agreements and practices that restrict free trading. They also monitor market leaders in order to ban abusive behavior, such as predatory pricing, refusal to deal and price gouging, where a seller prices goods at a level higher than what is considered to be reasonable. These laws also govern mergers and acquisitions of large corporations, where such may threaten the competitiveness in the market by creating a monopoly.

 


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