What is 'Collusion'

Collusion is a non-competitive secret or sometimes illegal agreement between rivals that attempts to disrupt the market's equilibrium. Collusion involves people or companies that would typically compete, conspiring or working together that results in an unfair market advantage. The parties may collectively choose to restrict the supply of a good or agree to increase its price to maximize profits.

BREAKING DOWN 'Collusion'

In the financial markets, collusion can take many forms. Groups may collude by sharing private information, allowing them to benefit from insider knowledge. Traders participating in accommodation trading, where securities are exchanged at non-competitive prices, are involved in collusion. Colluding traders might share private information regarding upcoming takeovers, allowing them to benefit from insider trading. Price rigging also involves the collusion of sellers, who inflate the price of an asset to realize higher profits. There have been several high profile cases that involved prominent investment banks colluding on currency and commodity market prices.

Types of Collusion

Collusion may occur in several ways, typically producing the same end result – a party, often consumers, being disadvantaged in some particular manner. One of the most common forms of collusion is price fixing. This occurs when there is a small number of companies in the marketplace, commonly referred to as an oligopoly, essentially offering the same product, and agreement is made to collaborate and set a minimum price. Similarly, companies may collude by setting a maximum price for supplies that they purchase. Companies may collude to eliminate or reduce competition. A new entrant into the market may not want to enter into a collusion agreement; colluding companies may attempt to eliminate the new entrant through a buyout or reducing access to crucial business partners such as key distributors and suppliers. Collusion can occur through companies synchronizing their advertising campaigns; companies may prefer to limit consumers’ knowledge about a product or service in an attempt to prevent product and price comparisons.

Factors That Deter Collusion

The biggest deterrent against collusion in the United States is that it is an illegal practice; antitrust laws aim to prevent collusion between companies. It is extremely difficult to coordinate a collusion agreement, let alone execute one. This is particularly true if there are a large number of companies involved, especially in a heightened regulatory environment. Defection is another key deterrent of collusion. A company that initially agrees to take part in a collusion agreement may defect and undercut the profits of the remaining members. Additionally, the company that defects may act as a whistleblower and report the collusion to the appropriate authorities.

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