Collusion in the business world occurs when two or more competitors come together for mutual benefit. There can be various types of collusion or collusive pricing, such as formal collusion, price leadership, and tacit collusion. In this article, we will talk about tacit collusion.
Tacit collusion is similar to any other collusion, but with one major difference. In this collusion, there is no formal agreement between the competitors to collude to increase their revenue and profit. Or, we can say that in this collusion, the competitors make informal agreements without actually speaking to each other. Such a type of collusion is also there when one company in an industry is the price leader, and others follow the changes it makes.
This feature of tacit collusion makes it very difficult for the authorities to identify and prevent it. Tacit collusion is common in an oligopolistic industry and helps to reduce competition. One common example of this type of collusion is related to the price increase. If one firm in an industry raises its product price, then others follow the same.
Understanding Tacit Collusion
One best way to understand such a type of collusion is through the concept of game theory (or Nash equilibrium). Suppose there are two companies, X and Y. Separately, the two firms can increase their profit by going for aggressive advertising. But, their profits also depend on the action of the competitor.
Each company has two options. It can either go for more aggressive advertising or stay with the current level of advertising. But, if one firm chooses aggressive and other normal advertising, then the former will earn more profits.
And, if both the companies go for aggressive advertising, then none will register a growth; instead, their advertising costs would rise. In case both stay with their normal advertising strategy, then they would continue to enjoy the current level of sales without incurring extra advertising costs.
So, in such a scenario, it would be most advantageous for both the firms to stay with the normal advertising. This is the case of tacit collusion because here, both firms are unsure what the other will do if they go for aggressive advertising. Thus, if both think rationally separately (without communicating with each other), then the best option for them is to stay with the current level of advertising.
Types of Tacit collusion
Tacit collusion can be of two types:
In this, the companies share some information with each other but do not enter into any explicit agreement. We also call such collusion a concerted activity.
In this type of collusion, there are no talks and no exchange of information between the colluding companies.
Tacit Collusion is one of the biggest challenges to the free market. Such collusion reduces the competition and is not in the interest of the consumers. One thing that makes this collusion even more dangerous is that it is difficult to identify as well as prove. Since there is no formal agreement or communication between the companies, it gets very difficult for the authorities to identify or prove it.