Legal Definitions - tacit collusion

Tacit collusion occurs when competing companies coordinate their actions, such as pricing or production levels, without any explicit agreement, communication, or direct negotiation. Instead, they achieve a coordinated outcome by observing each other's behavior and making strategic decisions that anticipate and respond to their rivals' moves. This unspoken understanding can lead to market conditions that resemble a cartel, where competition is reduced, and prices may be higher than they would be in a truly competitive market.

Here are some examples to illustrate tacit collusion:

• Example 1: Airline Ticket Pricing

  Imagine two major airlines operating on a popular route. One airline raises its ticket prices for certain flights. The other airline, without any direct communication, observes this change and subsequently raises its own prices for similar flights by a comparable amount. Both airlines understand that if one lowers prices, the other will likely follow, leading to a price war that benefits neither. By matching price increases, they implicitly agree to maintain higher fares, benefiting both companies at the expense of consumers.

  This illustrates tacit collusion because there's no evidence of a meeting or phone call between the airlines to agree on prices. Instead, each airline makes its pricing decisions by observing and reacting to the other's public actions, leading to a coordinated outcome of higher prices.

• Example 2: Smartphone Feature Adoption

  Consider three leading smartphone manufacturers. Over several product cycles, each company consistently introduces new flagship phones with very similar high-end features (e.g., advanced camera systems, specific screen technologies, or battery improvements) around the same time each year. While they fiercely market their products as superior, they rarely innovate in a way that drastically undercuts a competitor's core offering or price point. Instead, they tend to follow a similar innovation trajectory, avoiding radical departures that might disrupt the market equilibrium.

  This demonstrates tacit collusion because the companies, without direct communication, appear to be following an unwritten rule of maintaining a similar pace and scope of innovation, avoiding aggressive moves that could lead to a competitive race to the bottom. Their parallel behavior suggests an unspoken understanding of how to compete without truly disrupting each other's market share or profit margins.

• Example 3: Local Gasoline Stations

  In a small town with only a few gas stations, it's common to see their prices remain almost identical, often fluctuating together. If one station raises its price by a few cents, the others typically follow suit within hours. Conversely, if one station lowers its price, the others might match it to avoid losing customers, but they rarely initiate aggressive price cuts that could lead to a prolonged price war. This pattern of matching prices ensures that all stations maintain similar profit margins without having to explicitly agree on pricing.

  This is an example of tacit collusion because the gas station owners are not meeting to set prices. Instead, each owner observes the prices of their competitors and adjusts their own prices accordingly, creating a stable, non-competitive pricing environment based on mutual understanding and anticipation of rivals' reactions.