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Oligopoly - What is Tacit Collusion?

Level:
A-Level
Board:
AQA, Edexcel, OCR, IB

Last updated 14 Mar 2023

Tacit collusion

Tacit collusion (or price leadership) happen when other businesses usually accept price changes established by a dominant firm and which other firms then follow.

Oligopoly Collusion (includes tacit collusion) - revision video

What is tacit collusion?

Tacit collusion is a type of collusive behavior where firms coordinate their actions without explicitly communicating or reaching an agreement. Instead, firms may signal their intentions through various actions, such as pricing behavior or output levels, in order to coordinate their behavior and achieve higher profits.

Unlike explicit collusion, which involves direct communication and agreement among firms to fix prices or divide markets, tacit collusion is more subtle and difficult to detect. In some cases, tacit collusion may occur naturally due to market conditions, such as limited competition or high barriers to entry.

Examples of tacit collusion include:

  1. Price leadership: In some industries, one firm may set prices that other firms follow, without any explicit agreement. This can lead to a stable market with little competition.
  2. Implicit understandings: Firms may have implicit understandings about each other's pricing or output behavior, without any direct communication or agreement.
  3. Limit pricing: A dominant firm in an industry may set prices at a level that deters entry by potential competitors. Other firms in the industry may follow suit, leading to higher profits for all firms.

Tacit collusion can be difficult to prove and is often illegal under antitrust laws, as it can lead to reduced competition and higher prices for consumers. Regulators may use various methods, such as analyzing pricing behavior and market structure, to detect and deter tacit collusion.

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