Firms may gain jointly from coordination but still want to undercut it.
Collusion coordinates firms' conduct, such as prices or output, instead of each choosing independently. Coordinated restraint can raise prices and combined profits while reducing competitive pressure, output or consumer surplus. Individual members may still gain by secretly discounting or exceeding an agreed quantity, which can undermine the arrangement and provoke retaliation. Similar prices alone do not prove an agreement: common input costs or other conditions can create parallel changes. Distinguish the economic mechanism from a legal finding that needs evidence.
- Coordination
- Collusion means firms coordinate decisions such as price or output instead of competing independently.
- Individual incentive
- A member may secretly break the arrangement by cutting its price or selling extra units while other firms keep prices high.
- Consumer effect
- Higher prices or fewer purchases can reduce consumer surplus: the difference between what buyers are willing to pay and what they actually pay for purchases.
Apply the distinction
Evidence
Parallel prices can reflect common costs; an actual agreement or legal violation needs evidence.
Durability
Monitoring, retaliation, entry and differences between firms influence whether coordination survives.
Worked example: Why one supplier may break an agreement
Three suppliers agree to limit deliveries in order to sustain a higher price. One considers quietly selling extra units while the others keep to their limits. Buyers can switch between these similar products.
- With less combined supply, buyers may face higher prices and fewer purchases than under independent competition, given demand.
- The deviating supplier may gain sales at the elevated price if rivals maintain their restrictions.
- If rivals detect this and also expand or cut price, the intended price support can weaken. Monitoring, entry and repeated interaction affect durability.
- Assess consumers and efficiency separately from joint profit; a gain to suppliers does not prove a gain to society.
Watch out for this
All firms in a collusive arrangement have no reason to break it.
An individual firm can face an incentive to gain extra sales while others hold back, even if collective restraint raises joint profit.
Check your understanding
Why might one member secretly discount while the others maintain a high agreed price?
- Because it must want lower sales.
- To gain additional sales while rivals maintain the price umbrella.
- Because identical prices establish that no firm has market power.