Collusive agreements are a common practice in the business world. In simple terms, it`s an agreement between two or more firms to work together instead of competing with each other. Such agreements can take different forms, including price fixing, market allocation, and bid rigging. In a collusive agreement, the firms involved typically agree to set prices at a certain level, limit production or output, and divide the market among themselves, ultimately leading to lower competition and higher prices for consumers.
The law prohibits collusive agreements because they are anti-competitive and violate fair trade practices. Collusion is illegal under most competition laws globally, including the US antitrust law, the EU competition law, and the UK competition law.
A group of firms that have made a collusive agreement is commonly known as a cartel. The term cartel refers to a group of companies that work together to control a particular market. The main purpose of a cartel is to restrict competition and maintain high prices for their products or services.
Cartels are often associated with illegal activities, and their formation can attract heavy fines and penalties. For instance, the European Union has imposed billions of dollars in fines on cartels for anti-competitive practices.
The consequences of collusive agreements are far-reaching. They lead to an inefficient allocation of resources, loss of consumer welfare, and the stifling of innovation. Collusion among firms also limits market entry, making it difficult for new businesses to enter the market and compete with established players.
However, despite the risks, some firms continue to engage in collusive activities. This is because the benefits of collusion outweigh the costs, at least in the short term. Together, the firms can maintain higher prices and profits, which can sustain their operations and growth.
In conclusion, collusive agreements, also known as cartels, are illegal and violate fair trade practices. They limit competition, leading to higher prices and a loss of consumer welfare. Government agencies and competition authorities worldwide are always vigilant to bust cartels and punish firms engaging in illegal activities. As a business, it`s essential to always abide by fair trade laws and compete fairly.