Question

5. Explain the difference between a cartel and tacit collusion. Is tacit collusion illegal in the United States? Explain.

typed answer please

Answer 1

A cartel is a formal agreement between firms, such as OPEC, to regulate the price of a commodity or item, etc. Tacit collusion happens when businesses make an unofficial price-fixing arrangement (i.e. without letting their rivals or official bodies know about it).

If oligopoly companies determine what quantity to produce and what price to pay in a certain market, they are faced with a tendency to behave as if they were a monopoly. Oligopolistic companies may hold down industrial output, charge a higher cost, and split income among themselves by working together. This is called collusion when companies work together to limit production and keep prices high. A community of companies with a formal agreement to collude is called a cartel to generate the monopoly product and sell at the monopoly price.

The compliance issue is finding hard evidence of collusion. Cartels are formal bribery contracts. These are unusual in the United States since cartel deals provide evidence of collusion. Rather, most collusion is covert, where businesses secretly come to understand that rivalry is bad for business.

Tacit collusion refers to the condition where, without specific agreements, rivals coordinate prices. Alternatively, they depend on mutual understanding that if they cooperate and keep the price artificially high, they can all make more profits, but any deviation from that (e.g. lowering the price to encourage further sales) will start a price war and damage the benefit of all. Tacit collusion may have the same effects as overt collusion, such as high price and/or low performance, but it can not be punished without any hard evidence of contact.