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January 17, 2018 

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PERFECT COMPETITION AND DEMAND: The demand curve for the output produced by a perfectly competitive firm is perfectly elastic at the going market price. The firm can sell all of the output that it wants at this price because it is a relatively small part of the market. As a price taker, the firm has no ability to charge a higher price and no reason to charge a lower one. The market price facing a perfectly competitive firm is also the firm's average revenue and, most importantly, its marginal revenue.

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IMPLICIT COLLUSION:

Seemingly independent, but parallel, actions among competing firms (mostly oligopolistic firms) in an industry designed to control the market, raise the price, and otherwise act like a monopoly. Also termed tacit collusion, the distinguishing feature of implicit collusion is the lack of any explicit agreement. This is one of two types of collusion. The other is explicit or overt collusion, which involves an explicit agreement.
Implicit collusion arises when two or more firms act to monopolize a market, without an explicit or formal arrangement. They key is that each firm seems to be acting independently, perhaps each responding to the same market conditions, but the end result is a monopolized market.

Know Thy Competitor

This form of tacit collusion depends on the mutual interdependence among oligopolistic firms and the intimate knowledge each has of the others. This is the sort of information that only results from years of competition. A good analogy is two professional tennis players who have competed against each other since childhood. Each players knows the strengths and weaknesses of the other. Each can anticipate the actions of the other.

Firms that have engaged in years of competition, can also come to anticipate the actions of the other firms. Such knowledge opens the door for implicit collusion. Two forms of implicit collusion commonly arise:

  • Conscious Parallel Actions: With this form of implicit collusion each firm raises its price knowing others in the industry will do the same. Each firm knows that this action will be beneficial to all firms in the industry. And each firm knows that every other firm knows that this action will be beneficial to all firms in the industry. Contact among the firms is not needed. An agreement is not needed. Each knows what to do.

  • Price Leadership: With this form of implicit collusion, one firm takes the lead of setting a price that will boost profits for the entire industry. Other firms then go along with this price, knowing that they stand to benefit by doing so. Years of familiarity means that they can trust this firm to set an "appropriate" price, a price that benefits all in the industry.
To see how implicit collusion might work, consider the hypothetical Shady Valley soft drink market. The major competitors in this industry are OmniCola, Juice-Up, Super Soda, King Caffeine, Mega Cola, Hometown Brew, Frosty Grape, and Cola-Riffic, with combined sales of almost 80 percent of the total market.

Conscious Parallel Actions

Consider how conscious parallel decision-making among these soft drink firms might work. Each firm knows full well how every other firm will react to changing market conditions. And each firm knows full well that every other firm knows full well how each firm will react to changing market conditions. Each firm knows full well when a higher price will boost overall industry profit. As such, each firm will "independently" set a higher price.

For example, OmniCola knows that with the upcoming summer holiday season, the soft-drink-buying public will demand more soft drinks. Acting independently, it might be able to maximize profit with a 5 percent price increase. However, knowing that Juice-Up, Super Soda, King Caffeine, and the other firms have the same expectations about summer holiday demand, a 10 percent industry-wide price increase maximizes total industry profit. With years and years of competition, OmniCola knows that Juice-Up, Super Soda, King Caffeine, and the others also know that a 10 percent price increase is best for all.

As such, OmniCola, Juice-Up, Super Soda, King Caffeine, and the other firms all raise their prices in anticipation of the upcoming summer holiday. While each firm is apparently reacting independently to changing market conditions, they are in fact implicitly colluding.

Price Leadership

Now, consider implicit collusion through price leadership. As the largest firm in the industry, OmniCola is a prime candidate for price leadership. While the largest firm in an industry need not be the price leader, it often is. OmniCola, knowing full well that it is the price leader of the industry, and knowing full well that every other firm knows full well that it is the price leader, evaluates market conditions, demand, the prices of non-soft-drink substitutes, taxes, input prices, and other assorted production costs, then decides that a 10 percent boost in the price of ALL Shady Valley soft drinks maximizes industry profits.

As such, OmniCola raises its price. Juice-Up, Super Soda, and the other Shady Valley soft drink firms knowing full well that OmniCola is setting an industry-wide price increase, follow with higher prices of their own products. Years of experience with OmniCola's leadership ensures the other firms that OmniCola is making the most profitable move for the entire industry.

Unlike explicit collusion, where the existence of an agreement that would lend evidence for an antitrust court case might be uncovered, implicit collusion is difficult to document and prove. Implicit collusion often appears to be nothing more than each firm independently reacting to changing market conditions. It is extremely difficult to distinguish between implicit collusion and competitive firms reacting to normal market conditions.

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Recommended Citation:

IMPLICIT COLLUSION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 17, 2018].


Check Out These Related Terms...

     | collusion | explicit 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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