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Collusion: When Government turns a blind eye
What is collusion and why illegal
Collusion is an agreement which occurs between 2 or more market players who use their
position in an oligopoly to gain unfair advantage. Effectively the firms can manipulate the
market and convert it into either a monopoly or drive up the entry barrier.

Collusion is illegal is most countries in the world and it is considered criminal under certain
circumstances. Here’s a few examples of when it is illegal
(i) Price-fixing:
Firms collude to fix the supply such that prices can be pushed up leading to higher
profits. The coordinated price if for the mutual benefit of the sellers. Most countries
have antitrust laws that require companies to establish price independently without
any discussion with competitors. Price fixing relates not only to prices, but also to
other terms that affect prices to consumers, such as shipping fees, warranties,
discount programs, or financing rates.

(ii) Market manipulation:

 A very common example of Market Manipulation is Insider Trading. when insiders
with important confidential information about a company take advantage of that
knowledge to make a profit or avoid losses by buying or selling their own shares of
the stock.
Another example is Bear Raiding, in which short selling is used to push down price.
J.P. Morgan had a class action alleging then to have colluded with HSBC to
manipulate the market and artificially push down the price of silver.

Legal cases:
1) Formal Collusion – OPEC
OPEC is the worlds largest cartel and consists of 50% of world’s oil suppliers. If the cartel
members decide they can choose to restrict supply and drive up prices. In the 1970s
there was shock to global economy because the cartel restricted supply and prices
increased by 3x. But since then OPEC countries have mostly agreed to maintain their
supply quota and member nations have tried to keep this arrangement working by not
cheating

2) Tacit Collusion –
a) R&D and innovation –
Research has shown that colluding can lead to improved R&D. Below is a study that
shows number of patents and R&D spending increased in the telecom industry
during the cartel era. Basically, the firms decided not to compete on pricing instead
they decided to improve the product offerings and working collaboratively helped
 make major breakthroughs.

(i) In EU allowed car manufacturers to work together to come up with emission

control technology that’s complaints with euro 5 and euro 6 specifications.
This and many other exceptions are defined in the Block exemption
regulation (BER).
(ii) We are seeing a live example of collusion being allows by Competition
Commission in response to the Covid-19 pandemic. The Commissioner of
Competition in Canada has allowed businesses to obtain informal guidance
from the Competition Bureau’s Cartels Directorate on proposed competitor
collaborations for Covid-19 research.

b) Information sharing for customer benefit

European antitrust consider information exchange of competitively sensitive
information as a violation. For e.g., if consumer data is being shared to force
consumer lock-in and prevent new entrants then that’s consider illegal.
But information is frequently shared in banking and insurance sectors about
consumer defaults and risk characteristics and allowing companies to announce it as
a signal of quality to consumers. This works in the overall welfare for both
companies and consumers

Reference:-
https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/dealings-
competitors/price-fixing

https://www.economicshelp.org/blog/21475/economics/collusion-meaning-and-
examples/#:~:text=The%20most%20famous%20cartel%20is,Price%20leadership.

https://www.hoganlovells.com/en/blogs/focus-on-regulation/when-an-information-exchange-
among-competitors-is-not-illegal-the-italian-tv-services-case

https://ec.europa.eu/commission/presscorner/detail/en/IP_19_2008

https://truthonthemarket.com/2020/01/24/the-upsides-of-collusion-and-concentration/

https://www.lexology.com/library/detail.aspx?g=27321f7f-e05f-4b9c-a52b-bf112932cfcf