What Is Collusion?

And Is It Always Bad?

Tommy John #25 of the New York Yankees, 1989
While collusion can hurt consumers as competition is limited, it can also hurt individuals (see Tommy John, below). David Madison/Getty Images Sport/Getty Images

Collusion is an agreement between two or more entities to limit open competition or gain an unfair advantage in the market by means of deceiving, misleading, or defrauding. These types of agreements are — not surprisingly — illegal, and therefore are also typically very secretive and exclusive. Such agreements can include anything from setting prices to limiting production or opportunities to kickbacks and misrepresentation of the party’s relationship to one another.

Of course, when collusion is discovered, all acts affected by the collusive activities are considered void or having no legal effect, in the eyes of the law. In fact, the law ultimately treats any agreements, obligations, or transactions as though they had never existed.

Collusion in the Study of Economics

In the study of economics and market competition, collusion is defined as taking place when rival companies who otherwise would not work together agree to cooperate for their mutual benefit. For instance, the companies may agree to refrain from participating in an activity that they normally would in order to reduce competition and gain higher profits. Given the few powerful players within a market structure like an oligopoly (a market or industry that is dominated by a small number of sellers), collusive activities are often commonplace. The relationship between oligopolies and collusion can work in the other direction as well; forms of collusion can ultimately lead to the establishment of an oligopoly.

Within this structure, collusive activities can make a significant impact on the market as a whole starting with the reduction of competition and then the likely possibility of higher prices to be paid by the consumer.

In this context, acts of collusion resulting in price fixing, bid rigging, and market allocation could place businesses in jeopardy of being prosecuted for violations of the federal Clayton Antitrust Act.

Enacted in 1914, the Clayton Antitrust Act is intended to prevent monopolies and protect consumers from unfair business practices.

Collusion and Game Theory

According to game theory, it is the independence of suppliers in competition with one another that keeps the price of goods to their minimum, which ultimately encourages overall efficiency of the industry leaders in order to remain competitive. When this system is in effect, no one supplier has the power to set the price. But when there are few suppliers and less competition, as in an oligopoly, each seller is likely to be acutely aware of the actions of the competition. This generally leads to a system in which decisions of one firm can greatly influence and be influenced by the actions of other industry players. When collusion is involved, these influences are typically in the form of clandestine agreements that cost the market the low prices and efficiency otherwise encouraged by competitive independence.​

Collusion and Politics

In the days following the tumultuous 2016 presidential election, allegations arose that representatives of the Donald Trump campaign committee had colluded with agents of the Russian government to influence the outcome of the election in favor of their candidate.

An independent investigation conducted by former FBI Director Robert Mueller found evidence that President Trump’s National Security Adviser Michael Flynn may have met with the Russian ambassador to the U.S. to discuss the election. In his testimony to the FBI, however, Flynn denied having done so. On February 13, 2017, Flynn resigned as national security director after admitting he had misled Vice President Mike Pence and other top White House officials about his conversations with the Russian ambassador.

On December 1, 2017, Flynn pleaded guilty to charges of lying to the FBI about his election-related communications with Russia. According to court documents released at the time, two unnamed officials of the Trump presidential transition team had urged Flynn to contact the Russians. It is expected that as part of his plea agreement, Flynn promised to reveal the identity of the White House officials involved to the FBI in return for a reduced sentence.

Since the allegations surfaced, President Trump has denied having discussed the election with Russian agents or having directed anyone else to do so.

While collusion itself is not a federal crime — except in the case of antitrust laws — the alleged “cooperation” between the Trump campaign and a foreign government may have violated other criminal prohibitions, which could be interpreted by Congress as impeachableHigh Crimes and Misdemeanors.”

Other Forms of Collusion

While collusion is most often associated with secretive agreements behind closed doors, it can also occur in slightly different circumstances and situations. For instance, cartels are a unique case of explicit collusion. The explicit and formal nature of the organization is what differentiates it from the traditional sense of the term collusion. There is sometimes a distinction made between private and public cartels, the latter referring to a cartel in which a government is involved and whose sovereignty likely shields it from legal action. The former, however, are subject to such legal liability under the antitrust laws that have become commonplace around the world. Another form of collusion, known as tacit collusion, actually refers to collusive activities that are not overt.  Tacit collusion requires two firms to agree to play by a certain (and often illegal) strategy without explicitly saying so.

Historical Example of Collusion

One particularly memorable example of collusion occurred in the late 1980s when Major League Baseball teams were found to be in a collusive agreement to not sign free agents from other teams.

It was during this period of time when star players like Kirk Gibson, Phil Niekro, and Tommy John – all free agents that season – did not receive competitive offers from other teams. The collusive agreements made between team owners effectively erased competition for players which ultimately severely limited the player’s bargaining power and choice.

Updated by Robert Longley

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Your Citation
Moffatt, Mike. "What Is Collusion?" ThoughtCo, Dec. 9, 2017, thoughtco.com/collusion-economics-definition-1147009. Moffatt, Mike. (2017, December 9). What Is Collusion? Retrieved from https://www.thoughtco.com/collusion-economics-definition-1147009 Moffatt, Mike. "What Is Collusion?" ThoughtCo. https://www.thoughtco.com/collusion-economics-definition-1147009 (accessed January 18, 2018).