Practices leading to tacit collusion

Price visibility

Price visibility can either promote competition, or promote tacit collusion

  • Promote competition
    • Consumers observe all prices and make more informed decisions
    • Firms can competitively adjust to price changes more easily
  • Promote tacit collusion
    • Firms observe all other firms’ prices
    • Visible prices make it easier to see if another firm is cheating the collusive agreement

Price preannouncement

  • Price preannouncements could lead to tacit collusion
    • Suppose firms are supplying in a way that maximizes their joint profits
    • Futher suppose there is a change in the market (i.e. demand, or costs change)
    • Collusive firms announce how they will adjust their prices, thus colluders are aware and can adjust accordingly
    • A firm can match the announced price to show agreement with the price change, or announce a different price to show disagreement
  • However, there are benefits to price preannouncements
    • Preannouncements help vendors submit bids (i.e. construction companies)
    • Eliminating preannouncements makes bidding much more difficult


  • Precommitment strategies help mitigate the incentive for colluding firms to cheat their agreement
    • These strategies can promote competition, or promote tacit collusion
  • A most favored customer (MFC) clause guarantees that a certain customer will never pay anything but the lowest rate charged by the firm
    • MFC acts as a price ceiling, which is good for consumer welfare

      “Buy today. If we charge a lower price within the next 6 months, we will refund the difference to you.”

    • A firm who offers an MFC signals that they will not cheat a collusion price

  • A meet the competition clause states that a firm is always willing to match prices offered by competitors on any future sale
    • These clauses ensure that all attempts to undercut the collusive price will be matched, thus eliminating any potential profits from cheating the collusive agreement

Price leadership

  • Price leadership can also facilitate collusive behavior
    1. Dominant firm price leadership
    2. Low cost price leadership
    3. Barometric price leadership
    4. Collusive price leadership
  • In general, these methods are hard to distinguish
    • Antitrust authorities must be very careful when convicting collusive behavior on the basis of price leadership

Dominant firm price leadership

  • Dominant firm price leadership can be thought of using our dominant firm model
    • A dominant firm observes the total demand of the industry and the presence of fringe suppliers
    • The dominant firm chooses a profit maximizing price above the competitive level, and the competitive fringe follows
    • The competitive fringe is now making profit
  • This is not necessarily collusive, just sound business practices

Low cost price leadership

  • Low cost price leadership has an intuitive explanation
    • Suppose firms are initially at a long-run competitive equilibrium
    • Further suppose that a firm has found some new way to significantly cut its costs
    • The low cost firm now sets a lower price, capture more of the market, and increase profit
    • Other firms can match this lower price and experience temporary losses, while they scramble to find ways to reduce their costs
  • This is not anticompetitive, nor is it tacitly collusive

Barometric price leadership

  • Barometric price leadership occurs when market participants believe that one firm is representative of the industry as a whole
    • Other firms observe what the represenative firm is doing, and adjust their strategies accordingly
    • If the representative firm serves as a good barometer of the industry, then all other firms will follow its lead
  • This is not necessarily anticompetitive

Collusive price leadership

  • Collusive price leadership can be thought of as a tacit alternative to an explicit collusive agreement
    • The assumptions of an oligopoly must be present (i.e. few firms, high entry barriers, homogeneous goods, etc.)
    • One collusive firm will be “elected” as the price leader
    • All other firms will match the price of the leader
    • This allows them to tacitly agree on a cartel price
  • This is considered anticompetitive