Name: Victor Kipchirchir

Matricola No: 121903

Università di Siena
Msc. Economics

Date: 12th November 2022

Table of Contents
ABSRACT........................................................................................................................................................ 3
Introduction .................................................................................................................................................. 4
Collusion........................................................................................................................................................ 4
Types of collusion.......................................................................................................................................... 6
Problems of collusion.................................................................................................................................... 6
Justification for collusion ...................................................................................................................... 7
Examples of collusion.................................................................................................................................... 7
Barriers to Collusion...................................................................................................................................... 8
Regulation for collusion ................................................................................................................................ 8
Game theory and collusion ........................................................................................................................... 9
Conclusion ................................................................................................................................................... 10
Bibliography ................................................................................................................................................ 11
ABSRACT

Any progressive society that aims at achieving the most effective welfare state must have
structures that acts as a watchdog that regulates the market and restricts some trading practices
whose main objective is to prevent both the growth and abuse of a monopoly power. This
government structures are what is referred to as Competition policy.
Competition policy has been by and large aimed to promote pluralism in the market, devolving
the economic decision-making thus stimulating small businesses.
Competition policy is also about applying rules to make sure market players compete fairly with
each other therefore promoting pluralism in the market. This boosts enterprise and efficacy,
creates a wider choice for consumers and helps reduce prices and improve product quality.
Moreover, competition laws are enacted to prevent anti- competitive business practices, abuse of
market power and anti-competitive mergers and acquisitions. Promote healthy competition,
consumers’ satisfaction will eventually be met.
The notion of collusion is commonly understood as serving a jurisdictional function, determining
the scope of Article 101(1) TFEU widely and not prejudging the substantive analysis of a
restriction of competition. Hence, it would only be limited by the definition of agreements,
decision by an association of undertakings, and concerted practices.
This essay will majorly focus on Competition law’s in EU. Specifically, on collusion and game
theory abuse of dominant positions and lastly on A case-study on collusion in EU.
Introduction

Collusion
Collusion is a non-competitive, secret cooperation, and oftentimes illegal agreement between
rivals which attempts to disrupt the market's equilibrium by dividing the market and/or limiting
opportunities and production. The act of collusion involves two or more parties which would
typically compete against one another, but who conspire to work together to gain an unfair
market advantage.
Markets regarded as oligopolistic are rich ground for the existence of collusion. In oligopolies
for instance, firm’s profits majorly depend on the actions of their competitors. Collusion is
difficult to coordinate if there are many competitors in a marketplace and thus found only in
oligopoly markets where there are only a few competitors with most of the market share.
For as long as there are few sellers in the market, collusive outcomes are likely to transpire even
without explicit agreements among firms in an oligopoly. This form of collusion that lacks an
explicit agreement is referred to as tacit collusion.
Collusion is not always illegal since it can be a tool to achieve objectives forbidden by law
although at the expense of the final consumer. Cases of collusion are frequently illegal, since
they are governed by antitrust laws. The aftermath of collusion is that the consumer ends up
paying higher prices than the competitive price.
Explicit collusion among competitors is illegal in pursuant to competition laws in jurisdictions
worldwide. The EU has strict rules protecting free competition. Under these rules, certain
practices are prohibited, as articulated below.
Article 101(1) of the TFEU prohibits all agreements between undertakings, decisions by
associations of undertakings, and concerted practices, whose object or effect is to restrict,
prevent, or distort competition. Both explicit collusion and concerted practices may thus serve as
independent infringements of Article 101(1). In particular, cartelistic practices such as price
fixing, limiting production, control of production, and market sharing are considered unlawful.
Arrangements forbidden by Article 101(1) may nevertheless be permitted under Article 101(3),
if the parties demonstrate they will lead to economic efficiencies and that consumers will share
in the resulting benefits.
It is therefore contrary to the rules prohibiting such undertakings for a producer to co-operate
with his competitors, in any way whatsoever. The consequence of infringing any EU's
competition rules is being fined as much as 10% of the annual turnover. In some EU countries
the culprits may face serious penalties, including prison.
EU competition rules apply directly in all EU countries and thus endorsed by the courts within
the Jurisdiction. These rules apply not only to businesses but to all organizations engaged in
economic activity commonly referred to as undertakings.
Legislation in different countries may consider different scenarios and penalties for such
agreements, but it is apparent that firms’ behavior shall not affect the correct functioning of
market forces.
Collusion makes allusion to the cooperation between different firms. This cooperation as earlier
stated, leads to a restrain of market competition, which translates into higher profits for the firms
in detriment of consumer’s welfare. A cartel is an example of firms belonging to the same
industry structure which collude to some degree in setting prices and/or output levels.
Agreements which have as their object or effect the prevention, restriction or distortion of perfect
competition are prohibited. Such agreements include, but are not restricted to, activities such as:
-fixing purchase or selling prices or any other trading condition, directly or indirectly;
-controlling or limiting production levels, markets, technological advances or
investments;
-sharing markets or resources supplies.
There are several indicators that collusion may be present in a given market. One instance is
when prices are determined by a group of suppliers at a uniformly high or low level. The second
example is when suppliers decline to sell in each other’s territories, thereby ultimately creating
regional monopolies. Another indicator is when some suppliers regularly reject to bid in
competitive bidding conditions, which allows the
remaining bidder to bid at an unusually high
price.
In the above example, a competitive industry will
have price P1 and Q competitive. If firms collude,
they can restrict output to Q2 and increase the
price to P2.

Collusion usually involves some form of

agreement to seek higher prices. This may
involve:

 Agreeing to increase prices faced by consumers.

 Deals between suppliers and retailers. For example, vertical price-fixing e.g. retail price
maintenance.
 Monopsony pricing – where retailers collude to reduce the amount paid to suppliers. For
example, a retailer with great buying power (Walmart, Amazon) can offer very small
profit margins to suppliers as they have little alternative.
 Collusion between existing firms in an industry to exclude new firms from deals to
prevent the market from becoming more competitive (entry barriers).
 Sticking to output quotas and higher prices.
  Collusive tendering. For instance, prices for competitive tendering in bidding of public
contracts. Collusion happens when a rival firm agrees to set high price to allow the pre-
determined firm to win with a relatively high contract offer.

Types of collusion
 Formal collusion – Businesses coordinate to achieve a collusive result and prevent issues
brought on by shock adjustments. These businesses formally agree to maintain a high
collusion price, which might entail setting up a cartel. This can involve the creation of a
cartel. The most famous cartel is the Organization of Petroleum Exporting States
(OPEC) which is an organization concerned with setting prices for oil by oil-rich nations.
 Tacit collusion – where firms make informal agreements or collude without actually
speaking to their rivals. This may be to avoid detection by government regulators.
The most usual form of tacit collusion is price leadership. It occurs when one lead
competitor company establishes a price that the other companies eventually accept as the
market price.
 Price leadership. It is possible firms may try to unofficially collude by following the
prices set by a market leader. This enables them to keep prices high, without ever
meeting with rival firms. This kind of collusion is hard to prove whether it is unfair
competition or just the natural operation of markets.

Problems of collusion
Collusion is not only bad for consumers but also for the general economic welfare, and therefore
it is mostly regulated by governments to avoid the following:

 High prices for consumers. This leads to a decline in consumer surplus and allocative
inefficiency (Price pushed up above marginal cost). When production is controlled, it
tends to create more demand because of the limited supply. This may push the prices to
unreasonable levels. Consumers also lose because of this, forcing them to purchase at
prices fixed by big companies and not by market forces.
 New firms can be discouraged from entering the market by types of collusion which act
as a barrier to entry. It discourages new firms from entering the market as the prices set
by the existing big businesses may not be sustainable, and the early days are always
crucial for small firms. They will be cut off from business deals and will not have enough
funds to keep running the business until they make some profit. As a result, it is difficult
for them to enter and profit.
 Easy profits from collusion can make firms lazy and avoid innovation and efforts to
increase productivity.
 Industry gets the disadvantages of monopoly (higher price) but none of the advantages
such as economies of scale
 Disruption of market dynamics. The market will experience control by big producers, and
prices will rise. As a result, the existing market equilibrium will face disruption.
Justification for collusion

 In times of unprofitable business conditions, collusion may be a way to try and save the
industry and prevent firms from going out of business, which wouldn’t be in the long-
term consumer interest. In extreme cases where profit declines, the industry struggles to
survive because of low profits. Collusion can help fix a price; the supply firms will
produce accordingly. Dairy suppliers tried to use this justification in 2002/03 after
problems from foot and mouth disease led to a decline in farm incomes.

 Expansion of business and growth

Businesses with a profit surplus create more outlets or ventures for expansion. They
contribute by making further profits, helping to create a brand, or increasing existing
brand value. They can also use them for research and business development purposes
along with improvement of quality.

Examples of collusion

EU Truck makers
In 2016, EU regulators imposed a record fine of 2.9 billion euros ($3.2 billion) against Europe’s
biggest truck makers for colluding over 14 years to fix prices and delay adoption of cleaner
engine emissions technology. The investigation found that the truck makers fixed vehicle prices
to pass the costs of required improvements on to customers, shielding their profits.
MAN blew the whistle, thereby escaping any penalty.

Major banks fined for Collusion

In 2019, The European Commission sanctioned Barclays, the Royal Bank of Scotland, Citigroup,
JPMorgan and Japan’s MUFG Bank a total of €1.07 billion after finding that traders colluded to
fix exchange rates using electronic chat rooms.
The commission said Swiss giant UBS received no fine as it revealed the collusion to the
authorities.

Milk price by supermarkets 2002-03

After a period of low milk, butter and cheese prices, supermarkets such as Asda and Sainsbury’s
colluded with Dairy suppliers, Dairy Crest and Wiseman Dairies to increase the price of milk,
cheese and other dairy products in supermarkets. After an investigation by Office of Fair
Trading(OFT), supermarkets and suppliers were fined a total of £116m.

The OFT found prices set by supermarkets went up by three pence per pint of milk, but the
income received by farmers did not go up.

Price fixing in air travel – British Airways and Virgin 2004-06

In 2007, British Airways was fined £270m for illegal price-fixing arrangements with Virgin on
long haul flights. The two companies met to agree and collude on the extra price of fuel
surcharges in response to rising oil prices. Between 2004 and 2006, surcharges on air tickets rose
from £5 to £60 per ticket. The £270m fine compares to an annual profit of £611m for BA.
Collusion over hiring practices.
In 2015, Apple and Google were investigated for an agreement between the two companies
where they agreed not to hire staff from the other company. This was an attempt to prevent wage
spirals due to workers moving between the companies. The companies agreed to make a
settlement rather than take it to court.

Barriers to Collusion

There can be significant barriers to collusion (J., 1992), these may include:

 The number of firms: As the number of firms in an industry increases, it is more difficult
to successfully organize, collude and communicate.
 Cost and demand differences between firms: If costs vary significantly between firms, it
may be impossible to establish a price at which to fix output. Firms generally prefer to
produce at a level where marginal cost meets marginal revenue, if one firm can produce
at a lower cost, it will increase its market share and have an advantage over the rival
 Asymmetry of information: Colluding firms may not have all the correct information
about all other firms, from a quantitative perspective or the moral hazard. In either
situation, firms may not know each other’s' preferences or actions.
 Chiseling: There is considerable incentive to cheat on collusion agreements; although
lowering prices might trigger price wars, in the short term the defecting firm may gain
considerably.
 Potential entry for new firms: New firms may enter the market and hence creating a more
competitive price thus eliminating collusion.
 Economic recession: An increase in average total cost or a decrease in revenue provides
the incentive to compete with rival firms in order to secure a larger market share and
increased demand.
 Anti-collusion legal framework and collusive lawsuit. This enhances less collusion as
firms will prefer situations where profits are distributed towards themselves rather than
the combined venture.

Regulation for collusion

EU competition rules apply directly through implementation of the following policies in order to
avoid breaches of competition law.

 Fines for companies convicted of collusion (up to 10 per cent of their annual turnover)
 Fines and imprisonment for company executives who are personally liable.
 Detect collusion by screening markets for suspicious pricing activity and high
profitability.
 Provide immunity to the first company to confess and provide the government with
information about the collusion (Leniency Policy).

N/B: Firms which act as whistleblowers can gain immunity from penalties. Therefore, if two
firms are colluding there is an incentive to be the first to blow the whistle and give information to
the authorities. Many competition authorities rely on leniency policies to detect, investigate and
prosecute hard-core cartels.

Game theory and collusion

Firm A

High Price Low Price

High Price (Collusion)

€ 2m – A
Firm B € 6m – A € 8m – B
€ 6m – B
Low Price (non-collusion)
€ 8m – A € 4m – A
€ 2m – B € 4m – B

 If firms are competitive and they set low price -they will both make £4m.
 If they collude and set high price, then they will both double their profits and make £6m.
 However, if during collusion, firm A undercuts the collusive price and sets a low price –
it is able to sell more. In this case, firm A benefits from the best of both worlds. Prices are
high because firm B is setting high price, but firm A is also selling large quantity because
it is undercutting its rival. In this case, firm A makes £8m and firm B only makes £2m.
 Therefore, firm B is unlikely to keep prices high and the market reverts to both setting
low prices.

The optimal outcome for the firms is to collude (high price, high price) However, whether this
occurs depends on whether there are incentives to keep colluding

 For example, legal restrictions on collusion can make it unstable. If a firm reports the
collusion to the regulator, then the firm is immune from being fined; it is the other firm
which will suffer. Therefore, in collusion, there is a strong incentive to be first to confess.
It is a very risky strategy to continue with the collusion, hoping the other firm won’t run
to the regulator.
 This is why the law is designed as it is – with a strong incentive to be the one to confess.
The downside is that firms who collude for a long-time can be immune from prosecution
and being fined.
Conclusion
To conclude, as much as there is justification to collusions as stated in this paper the
disadvantages outweigh it simply because the role of regulation is to promote competition and to
maximize the social welfare of the consumer. Collusion does neither.
Bibliography
Herbert Hovenkamp, Federal Antitrust Policy, The Law of Competition and Its Practice (6th edn,
Hornbooks 2020), Chapter 4.
Jonathan Faull and Ali Nikpay (eds.), The EU Law of Competition (2nd edn, Oxford University
Press 2007).
Joseph E. Harrington, Jr., ‘A Theory of Tacit Collusion’ (2012) Economics Working Paper
Archive 588, The Johns Hopkins University, Department of Economics.
Richard Whish and David Bailey, Competition Law (10th edn, Oxford University Press 2021),
Chapters 3, 14.
Tirole, J. (1992), "Collusion and the Theory of Organizations", Advances in Economic Theory:
Proceedings of the Sixth World Congress of the Econometric Society, ed by J.-J. Laffont.
Cambridge: Cambridge University Press, vol.2:151-206