Tacit collusion

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Template:Oligopoly strategic interaction feature

Definition

Tacit collusion is a form of collusion typically seen in an oligopolistic market structure, where competing firms providing a good do not explicitly collude on any feature (such as price, quantity, or product characteristics), but rather, observe and imitate each other's actions in a way that is mutually beneficial to both sides.

Effects

Note that tacit collusion may be beneficial or harmful to the buyers and other parties involved:

  • Tacit collusion can hurt buyers/consumers: This includes tacit collusion to keep prices high, raise prices, or avoid engaging in research and product development that is likely to push prices lower or improve quality. On average, such collusion can reduce social welfare, since it makes the firms behave like a cartel close to a monopoly. For instance, charging higher prices than marginal costs mean that some part of the social surplus that could be achieved by selling to buyers whose reservation price is between the marginal cost and price is lost (a deadweight loss).
  • In some cases, tacit collusion can increase social surplus: This happens if the tacit collusion helps firms avoid an arms race along a competition parameter that is used to grab market share from each other without expanding the total market or making the good better for buyers. For instance, tacit collusions can help firms reduce their advertising expenditures, which can be socially beneficial if the advertising was merely to grab market share from one another rather than expand the total size of the market (number of people or amount each person buys). If advertising expenditures are a mix of grabbing market share and expanding the size of the market, then it is harder to judge the nature of the impact of tacit collusion on the social surplus.