Can anyone explain what 'Collusion' is?
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Can anyone explain what 'Collusion' is and how it might affect a market or market structure?
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well i believe a collusion is a secret agreement between two or more parties for a fraudulent, illegal, or deceitful purpose.
so it may affect the market by giving some businesses an unfair advantage :)
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It's when firms act together in order to distort market conditions. It is illegal and if caught the firms involved face the competition commission who can enforce fines and this leads to the prisoners dilemma. If both firms admit to the collusion then they both get low fines, if firm A admits and B doesn't firm B is fined heavily and firm A may be let off or vice-versa, If neither firm admit then they could potentially get away with it because the commission doesn't have enough evidence to prosecute them, but this is unlikely because nmeither firm trusts the other that much.
By colluding the firms may be able to set prices at a low level to force firms out of the market (predatory pricing) or to stop entry to the market (limit pricing), this stops competetion and in the long run allows firms to increase prices as supply in constricted and therefore gain monopolistic profits.
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1. Collusion: Collusion occurs when firms make joint agreements to restrict output and increase price in order to maximise their joint profits. For collusion to be effective the majority of the firms in the market must be in agreement, otherwise those who do not agree will undercut the high prices of those colluding and take their market share and their supernormal profits.
§ Explicit Collusion (Cartel) – There is a formal agreement to restrict output and raise prices by a group of producers. OPEC is a famous example of a cartel. Cartels do not usually last into the long run, there is always the temptation to cheat for individual members. The first firm to break the price agreement and reduce prices will steal significant market share from the others.
§ Implicit (tacit) collusion – Informal agreement and no communication between firms, but prices remain higher than they would with competition.
Loss of consumer surplus
Collusion will result in lower output and higher prices than a competitive market. There will therefore be a loss of consumer surplus, known as a dead weight loss to society.
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Do we have to know that for GCSE Economics??