As the United States prepared to take a long holiday over the July 4th weekend, the Department of Justice set off some fireworks of its own: the department published a new edition of the FCPA Resource Guide, a one-volume compendium of all things related to the Foreign Corrupt Practices Act (FCPA). What does the Foreign… Read More
When a group of firms cooperates to maximize their profits in the marketplace instead of competing with each other, this is known as collusion. Collusion gives firms an unfair advantage in the marketplace and collusive practices like price fixing are designed to unfairly benefit firms at the expense of the consumer.
What is Collusion?
Collusion is an anticompetitive business practice where firms work together to engage in illegal acts of market manipulation that earn them greater profits at the expense of the consumer.
Collusion is most common within industries where there are relatively few firms operating, high fixed costs, high barriers to entry, relatively inelastic demand for goods, and limited government regulations.
What are Examples of Collusion?
We can point to many examples of collusion in business, politics, and other contexts:
- The Organization of Petroleum Exporting Countries (OPEC) is a cartel of oil-producing nations that collude to fix the price of oil and restrict production through a quota system.
- The Competition Bureau of Canada released documents in 2018 alleging a price-fixing scandal involving seven companies (bakers and grocers). These companies colluded to increase the price of bread by a minimum of $1.50 per loaf and pressured downstream retailers to do the same.
- At least one analyst has suggested possible product and price collusion between ice cream makers Haagen-Dazs and Ben & Jerry’s in 2013.
- It was revealed in 2019 that three German automakers colluded to maximize their profits by slowing the development of clean emissions technology.
Is Collusion Illegal?
Collusion is an unethical business practice that hurts consumers, and is illegal in most jurisdictions. In the United States, business collusion is made unlawful by the Sherman Act of 1890 (Sections 1 & 2) and the Federal Trade Commission (FTC) and Clayton Antitrust Acts of 1914.
The Sherman Act in particular prohibits firms from entering into collusive agreements that harm other parties and sets the maximum fine for corporate collusion at $100 million.
The FTC Act prohibits corporations from engaging in unfair, misleading, or deceptive conduct and practices as they participate in commerce.
The Clayton Act creates specific bans on predatory pricing, price fixing, and price discrimination, all activities that are typical of colluding firms. It also bans corporations from participating in exclusive dealing (only doing business with a select group of firms) or attempting to form a monopoly.
What are the Two Types of Collusion?
Collusion between firms can be observed in two different forms: explicit collusion and implicit collusion.
Explicit collusion happens when a group of firms establish a formal agreement to engage in collusive commercial practices. However, since collusive practices are generally illegal, firms are likely to avoid creating documentation of any such agreement. A contract detailing the terms of collusion might also be difficult to enforce in court for the same reason. Instead, a formal agreement to collude may be reached verbally and in-person.
Implicit collusion happens when a group of firms manipulate the marketplace through interdependent actions, but without coming to a formal agreement. Price leadership, a practice where one firm sets the price for a good and other firms simply follow suit, is a classic example of implicit collusion in business.