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Chapter 21: Problem 774

What is collusion?

Short Answer

Expert verified
Collusion occurs when two or more companies or individuals agree to cooperate in order to gain an unfair advantage, manipulate prices, or restrict competition in the market, often breaching anti-trust and fair competition laws. For example, two gas stations located across the street from each other secretly agree on a fixed price for their gasoline, charging higher prices than they would in a competitive market. Consequences of collusion include fines, penalties, and imprisonment, as well as negative impacts on consumers and market investors.

Step by step solution

01

Define Collusion

Collusion occurs when two or more companies or individuals agree to cooperate in order to gain an unfair advantage, manipulate prices, or restrict competition in the market. This kind of cooperation is often illegal as it breaches anti-trust and fair competition laws.
02

Provide an Example

Suppose there are two gas stations located across the street from each other. Both gas stations compete with each other, driving down prices to attract customers. However, one day, the owners of the gas stations decide to secretly meet and agree on a fixed price for their gasoline. By doing so, they can both charge a higher price than they would in a competitive market and share the increased profits. In this scenario, the two gas station owners are engaging in collusion.
03

Consequences of Collusion

Collusion, if discovered, can result in severe consequences such as fines, penalties, and even imprisonment for the individuals or companies involved, as it is illegal in most countries. Additionally, collusion can lead to the detriment of consumers, as they might face higher prices and reduced options in the market as a result of reduced competition. Returns for investors in the market can also be impacted negatively, as high profits can be retained by the colluding companies for prolonged periods of time.

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Most popular questions from this chapter

Suppose that the four firms in an oligopoly are getting together to collude. How might ease of entry into their industry affect how high they set their prices?

What is the difference between explicit and tacit collusion?

What is the difference between collusion, cooperation, and competition? How would you define collusion between two people so as to exclude partnerships and corporate joint ownership from the concept of collusion? Why is collusion considered undesirable?

What is economic concentration?

In oligopoly we have a "few" firms and hence we do not reap all the benefits of perfect competition. The other side of the coin is an industry in which there are an excessive number of sellers. Explain the consequences of this situation
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