March 21, 2018 

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MARGINAL FACTOR COST: The change in total factor cost resulting from a change in the quantity of factor input, found by dividing the change in total factor cost by the change in quantity of factor input. Marginal factor cost, abbreviated MFC, indicates how a firm's total factor cost is affected by hiring one more or one fewer worker. Two related concepts are total factor cost and average factor cost.

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A formal, usually secret, collusion agreement among competing firms (mostly oligopolistic firms) in an industry designed to control the market, raise the market price, and otherwise act like a monopoly. Also termed overt collusion, the distinguishing feature of explicit collusion is that it involves some sort of agreement among the colluding firms. This is one of two types of collusion. The other is implicit or tacit collusion, which does not involve an explicit agreement.
Explicit collusion arises when two or more firms agree to control the market price and production. The agreement underlying explicit collusion could be as elaborate as an extensive written document--usually an alternative reserved for legal international cartels among countries. Or it could be as simple as an undocumented, unrecorded dinner conversation among the heads of several competing firms. The latter case tends to be more common in the United States in large part collusion violates antitrust laws. Secrecy is thus of paramount importance for colluding firms. Their collusive agreement might be explicit, but it needed not be documented.

A Lot of Competition

To see how explicit collusion might work, consider the hypothetical Shady Valley market for athletic shoes, which is dominated by two firms--The Master Foot Company and OmniRun, Inc. These two companies have been arch rivals for years. When OmniRun introduced the OmniFast 9000, Master Foot developed the Fleet Foot 40. When Master Foot launched an advertising campaign featuring baseball superstar Harold "Hair Doo" Dueterman, OmniRun countered with an advertising blitz featuring motion picture mega-star, Brace Brickhead.

Such constant competitive actions have been quite costly to both firms. The promotional expense of hiring celebrity spokespersons was not cheap. The cost of continually developing new, improve athletic shoes was enormous. These and other competitive activities ate into the profits of both firms. A little cooperation might be welcomed.

A Little Cooperation

Cooperation could take the form of a legal merger between OmniRun and The Master Foot Company. This action, however, is likely to take years to complete and is also likely to be vetoed by the government. Another form of cooperation might be more suitable for the firms--collusion.

Suppose that one pleasant spring day, Winston Smythe Kennsington III, President and Chief Executive Officer of OmniRun, Inc. decides to enjoy a tasty sandwich at Manny Mustard's House of Sandwich. By sheer coincident, Catherine Goodluck, Winston's counterpart head of The Master Foot Company, takes a seat at a nearby table.

In all likelihood, the conversation quickly and naturally turns to the athletic shoe market, each bemoaning the problems created by their continuing competition.

Before Manny Mustard can toss a couple of ham slices on rye, Winston and Catherine are bound to realize the mutual benefits of cooperation. Why not scale back on their advertising? After all, each has been advertising largely to counter the advertising of the other. Why not scale back on developing new shoes? After all, each has been developing new shoes largely to counter the new shoes developed by the other. And while they are in such a cooperative mood, why not boost their prices by an extra 20 percent? After all, if any consumers buy athletic shoes, then they MUST buy from Master Foot or OmniRun.

What could possible stop these two firms from implementing this collusive arrangement? Perhaps Winston jots down a few notes on his napkin, which he absent-mindedly leaves behind. Or maybe Sylvester J. Peabody, the head of the antitrust division of the Shady Valley branch of the Justice Department, happens to be at an adjacent table recording the entire conversation. However, if such incriminating evidence is not available, then OmniRun and Master Foot can monopolize the athletic shoe market.

Good for Some, Bad for Others

With this collusive agreement, shoe prices rise. Revenue for each firm increases. Profit for each goes higher. It is a win-win situation for Winston and Catherine, for OmniRun and Master Foot. In fact, this agreement is so good, they might "accidently" bump into each other at Manny Mustard's House of Sandwich on a weekly basis, where they reevaluate prices and explore other areas of cooperation. Perhaps they tack another 30 percent onto shoe prices. Maybe they reduce wages by 20 percent. The benefits of cooperation are almost endless.

Of course, the athletic-shoe-buying-public loses. They pay more. They do not benefit from new, innovative designs that help them run faster and jump higher. And society loses with an inefficient allocation of resources.

Of course, Sylvester J. Peabody might just happen to be at an adjacent table with state-of-the-art recording equipment during one of these chance luncheon encounters between Winston and Catherine. He might just pick up a discarded napkin with a few of Winston's absent-minded scribblings. He might just make use of the nation's antitrust laws to prevent further collusion.


Recommended Citation:

EXPLICIT COLLUSION, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2018. [Accessed: March 21, 2018].

Check Out These Related Terms...

     | collusion | implicit collusion | cartel | merger | conglomerate merger | horizontal merger | vertical merger |

Or For A Little Background...

     | oligopoly | oligopoly, behavior | oligopoly, characteristics | industry | market structures | market control | firm | industry | competition among the few | short-run production analysis | profit maximization | production |

And For Further Study...

     | market share | concentration ratios | four-firm concentration ratio | eight-firm concentration ratio | barriers to entry | product differentiation | game theory | kinked-demand curve | kinked-demand curve analysis | collusion production analysis | collusion, efficiency |

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