What is the difference between explicit collusion and implicit collusion? Give an example of each. What is a cartel?

Imagine a scenario where two or more companies secretly agree to play by the same rules in order to control the market. That's explicit collusion – a direct, often covert, agreement between competitors to influence prices, limit production, or divvy up the market. It's like athletes conspiring to fix the outcome of a race rather than competing fairly. A quintessential example is the OPEC oil cartel, with member countries agreeing on output levels to influence global oil prices.

Such practices are generally illegal as they undermine free market principles, restrict competition, and hurt consumers by artificially inflating prices or decreasing the quality of products and services.

On the flip side, implicit collusion is when companies mirror each other's business strategies – like pricing – without a wink or a nod or any formal agreement. It's more subtle and often skirts the edges of legality. A classic case is airlines setting ticket prices: one airline raises its fares, and soon after, the others follow suit, without any back-room dealings. This tacit coordination allows businesses to reap the benefits of collusion, maintaining higher prices while avoiding explicit illegal activity.

The key to implicit collusion is mutual understanding and inter-firm transparency. If businesses can easily observe each other's pricing, they can adjust their own prices in tandem, flying under the radar of direct collusion.

A cartel emerges from the shadows when independent competitors conspire to act as a single entity. It's like a secret society within a market, where members agree on production limits, prices, or market-sharing agreements, all to exert control over the supply-and-demand balance. Cartels, such as those controlling diamonds or oil, have the power to significantly impact global markets and political landscapes.

Due to their immense influence on market dynamics and potential to harm consumer welfare, cartels are often subject to strict regulations and antitrust laws. Many countries have legal frameworks to break up cartels and penalize companies engaged in such anti-competitive behavior.

Price fixing is the process by which competitors agree on pricing points, effectively eliminating the price war and establishing a market standard. It can involve setting a minimum price, a maximum discount, or even standardizing the actual prices charged to consumers. An everyday example could be retailers agreeing to sell a popular toy at the same fixed price to ensure they all benefit from equal profits.

While price fixing might sound like a savvy business strategy, it's actually a serious antitrust violation in many jurisdictions. Consumers often lose out on the benefits of competition, like fair pricing and choice, which is why authorities are vigilant in dismantling such arrangements.

Market shares refer to the portion of a market controlled by a particular company, measured through sales volume or revenue. It reflects the competitiveness of a company in relation to its rivals. High market share can be indicative of market power, which companies may try to leverage unfairly through collusion.

Understanding market share is essential for businesses to gauge their position in the industry, strategize expansion, and for regulatory bodies to monitor for potential anti-competitive behavior. It's a fine line between dominating a market through excellence and innovation, and unfairly controlling it through collusion.

Price leadership occurs when one predominant company in an industry sets the price for a product or service, and other competitors follow suit, effectively aligning their pricing structure with the market leader. It can be a natural outcome in markets with a clear leader that has cost advantages or a large market share. However, it can also be a form of implicit collusion if the leader's price changes are predictably followed by others, limiting aggressive price competition.

In practice, price leadership can make it easier for companies to avoid price wars. Yet, it treads a fine line legally, for if it results in an intentional coordination of prices amongst businesses, it could constitute an antitrust issue.