Tacit Collusion

Background

Tacit collusion refers to a market behavior where firms engage in actions that avoid explicit communication or agreements but still collectively coordinate their strategies mutually beneficially. This can lead to outcomes resembling those of a cartel without any overt or legally accountable interaction.

Historical Context

The concept of tacit collusion has been observed and studied in various market structures, particularly within oligopolies where a few firms dominate and extensively monitor each other’s activities. The term gained traction as economists explored the strategic interaction of firms who are keen not to trigger price wars but prefer steady competition to maximize overall profitability.

Definitions and Concepts

Tacit collusion occurs when two or more firms in a market implicitly coordinate actions such as pricing, output levels, or market division without direct communication or formal agreements. Unlike explicit collusion, tacit collusion is harder to detect and prosecute as it operates within the bounds of the law.

Major Analytical Frameworks

Classical Economics

Classical economics, largely associated with Adam Smith, posits that markets operate best with minimal intervention. Collusion, whether tacit or explicit, would be seen as a market imperfection needing rectification, yet classical economists largely left tacit behavior outside their primary analysis.

Neoclassical Economics

In neoclassical economics, which emphasizes marginal analysis and market equilibrium, tacit collusion can be analyzed through game theory. Here, it’s studied how rational players in a non-cooperative game might achieve higher payoffs through mutual understanding and anticipation of rival’s actions rather than disrupting competition through explicit collusion.

Keynesian Economics

Keynesian economics focuses on macroeconomic factors and policies for aggregate demand management. Tacit collusion is considered mainly at the microeconomic level, influencing market structures and pricing behavior, potentially leading to reduced competitive pressures.

Marxian Economics

From a Marxian perspective, tacit collusion reflects inherent contradictions and exploitative tendencies within capitalist frameworks where large firms seek to maintain dominance and suppress competition to maximize capital accumulation.

Institutional Economics

Institutional economics emphasizes the role of institutions and evolving norms. Tacit collusion can be attributed to informal norms and unwritten rules within certain industries that guide competitive behavior towards mutual benefits.

Behavioral Economics

Behavioral economics, examining psychological factors affecting economic decision-making, explores how firm executives perceive rivals’ intentions and reciprocate expected behaviors without explicit collusion using implicit signals and reputation mechanisms.

Post-Keynesian Economics

Post-Keynesian theorists consider tacit collusion an example of market imperfections challenging neoclassical conclusions about market efficiency, calling for economic policies to manage oligopolistic power to ensure fairer market dynamics.

Austrian Economics

Austrian economists, who focus on market process and entrepreneurial discovery, might recognize tacit collusion as market practices and evolve through firms striving for cooperative advantages within market processes without formal agreements.

Development Economics

Tacit collusion can have significant implications in developing economies where small markets and significant entry barriers enable established firms to engage in coordinated strategies, affecting competition and growth inclusivity.

Monetarism

While focusing primarily on money supply’s role in economic regulation, monetarist frameworks might note tacit collusion as one of the microeconomic factors influencing prices independent of monetary policy.

Comparative Analysis

Tacit collusion differs from explicit collusion primarily in the lack of formal agreements, making it ambiguous legally but sometimes similarly impactful on market pricing and output strategies. Different economic frameworks study and interpret tacit collusion from varied angles, thus reflecting their distinct analytical priorities.

Case Studies

Airline Industries: Understanding fare and route adjustments to avoid price wars.
Telecommunication Sector: Operators tend to follow each other’s pricing strategies.
Oil and Gas Companies: Navigating production levels without explicit norms to maintain stable pricing.

Suggested Books for Further Studies

“Oligopoly Pricing: Old Ideas and New Tools” by Xavier Vives
“Industrial Organization: Theory and Practice” by Don E. Waldman and Elizabeth J. Jensen
“The Theory of Industrial Organization” by Jean Tirole

Explicit Collusion: Direct communication and agreements between firms to fix prices or control market shares.
Oligopoly: A market condition where a small number of firms dominate and significantly influence market prices and competition.