What is Collusion?
Collusion refers to an anti-competitive, sometimes clandestine and illegal agreement between supposed market competitors to control prices and/or supply for their benefit. Typically, some (not necessarily all) market participants collude in order to boost their profits.
Nothing comes for free, of course. Those extra profits often come at the expense of other competitors, along with consumers.
Consider the competitors that have been left out of the agreement. Colluding companies could coordinate a sale, taking customers away from the businesses that have been left out.
Or view collusion from the consumer’s perspective. If you find it difficult to obtain a commodity or all companies sell it at the same price, then they don’t have much of a choice but to buy what’s offered. Collusion can cause significant damage if price fixing occurs with essential goods, such as antibiotics, gas, etc.
Collusion usually takes place within an oligopoly, a market structure where two or more participants have the market share to significantly influence each other but not enough to corner the market.
Types of Collusion
Collusion comes in two main forms: formal and tacit collusion.
Formal collusion
As the name suggests, formal collusion refers to when market competitors officially agree to set supply and/or prices at a certain amount. You usually won’t find formal collusion in the U.S. (along with many other countries), as that would leave evidence of illegal behavior.
Cartels are groups formed through formal collusion. While you have probably heard the term in relation to the illegal drug trade, the Organization of the Petroleum Exporting Countries (OPEC) is a much-debated example of a completely public cartel.
In 2018, OPEC held nearly 80% of all oil reserves in the world. See whether the Zero Theft community has found strong evidence that the U.S. public is getting ripped off.
Tacit collusion
Tacit collusion refers to informal agreements between competitors where they don’t actually coordinate in overt ways. Likely, market participants collude tacitly in order to avoid detection by regulatory authorities.
Price leadership serves as an example of tacit collusion. Market participants can try to unofficially collude by changing their prices or supply based on the decisions of the market leader. This strategy enables would-be rivals to manipulate the market, without ever having to meet each other.
Tacit collusion, due to complex schemes and a lack of a paper trail, often evades regulatory watch.
The Foundation for Economic Education provides an infamous example of an obscure collusive scheme executed in the 1960s. The FEE alleges that General Electric, Westinghouse, Allis-Chalmers, and I-T-E “coordinated a pervasive price conspiracy in selling heavy electrical equipment to the government.”
So, why did this case of market manipulation go down in infamy?
Bid rigging, based on moon phases.
The FEE, in the article linked above, goes on to explain, “The firm to enter the lowest bid was determined by the fullness of the moon. This phase of the moon strategy was foolproof for decades and was only discovered in 1959 by a reporter in Tennessee, who noticed the peculiarity of the identical bids. The conspiracy is estimated to have cost consumers $175 million in every year of its decades-long existence.”
Economic Damages of Collusion
Economists have discussed the economic damages of collusion since the 18th century. Much of what they proposed and debated led to the antitrust reforms that have occurred throughout the centuries.
Adam Smith, the Scottish ‘Father of Economists,’ raised concerns about collusion all the way back in the 18th century. In his magnum opus The Wealth of Nations, Smith made the following comment:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
Making money to feed oneself and one’s family, as well as a whole host of other reasons, compelled many laborers to quietly accept low-paying jobs. Especially during the times before antitrust and labor laws, business owners held overwhelming power over the working class.
Reasons why collusion harms the economy and the public
Many view collusion as harmful to consumers and a nation’s general economic welfare.
In the U.S., laws prohibiting collusion (the Sherman Antitrust Act, in particular) emerged around the time of the Progressive Era (1896-1916). Government officials feared growing railroad and oil monopolies, thus cracking down with regulations and dissolutions.
Here’s why collusion can often harm the public and the economy:
Price fixing
Price fixing can lead to exorbitant costs for consumers. This especially hurts when it comes to essential goods, such as life-saving medications. Take the case of insulin, a long-standing drug administered to combat diabetes. Insulin prices are reportedly still on the rise while Americans have had to ration their supply due to insufficient funds. A Federal Judge recently approved a Texas County lawsuit accusing several pharmaceutical companies and pharmacy benefit managers of insulin price fixing.
Have you wondered why U.S. drug prices are so much higher than in other countries? The RAND Corporation, a nonprofit, used 2018 data to conduct a study finding that prescription drug prices in the U.S. are 256% higher vs other countries. See whether the Zero Theft community has voted that the pharmaceutical industry is ripping off the U.S. public.
Barriers to entry
Established companies can also collude to prevent new competition from entering the market. Rivals can use numerous schemes to set up barriers to entry. One being ‘limit pricing.’ This scheme refers to when colluding rivals actually reduce the price of a commodity to the point where potential/emerging competition either gets deterred from entering the market whatsoever or dies out due to small (or negative) profit margins.
Discourages productivity and innovation
Why innovate or improve when you can keep selling the same product for a higher price without giving extra value? So instead of a company spending its time focusing on bringing out the best product to compete with their rivals, they might engage in tacit collusion to boost profits.
Or perhaps to maintain profits on an old product, companies might collude to keep prices high and continue to gain as much profit as possible over time.
This unproductive mindset often leads to ‘rent-seeking behavior,’ when a company or individual gets more than the value they provide by focusing on hiring lobbyists to influence legislators. That’s how they can secure tax breaks and lax regulations.
Examples of Collusion
Libor Scandal
In 2012, the LIBOR scandal refers to an alleged scheme in which bankers at several global financial institutions colluded to fix the London Interbank Offered Rate.
LIBOR is a global benchmark interest rate referred for a wide range of financial deals, including interest rates on corporate loans, student loans, mortgages, and many more. To put it simply, manipulating LIBOR causes interest to be mispriced all around the world.
The Department of Justice (DOJ) published a press release detailing the role of DB Group Services, a UK subsidiary of Deutsche Bank, in the scandal. The press release states that the financial institution “pled guilty to wire fraud for its role in manipulating the London Interbank Offered Rate (LIBOR).”
Quoted below is a text conversation discovered during the DOJ’s investigation:
“
…a UBS trader asked a Deutsche Bank trader, “cld you do me a favour would you mind moving you 6m libor up a bit today, i have a gigantic fix…”
The Deutsche Bank trader agreed.
The next day, the Deutsche Bank trader confirmed that the Yen LIBOR submission had been beneficial to the UBS trader, asking “u happy with me yesterday?”
The UBS trader acknowledged, “thx.”
The DOJ ordered Deutsche Bank to pay approximately $2.519 billion, according to the press release linked above.
Citizen investigators are on the case! They have investigated the matter and authored proposals explaining what happened and how much theft occurred. Vote now so the public knows just how much got ripped off from us.
Odd-eighth NASDAQ quotes
Professors William G. Christie and Paul H. Schultz, in the 1990s, noticed that NASDAQ quotes appeared only in quarters rather than ‘odd-eighth’ quotes (i.e. quotes that end in one, three, five, or seven eighths). After investigating the matter, the professor published the study “Why did NASDAQ Market Makers Avoid Odd-Eighth Quotes?”
Christie and Schultz found that 70 out of 100 actively traded NASDAQ securities did not have odd-eighth quotes, arguing “individual market makers implicitly agree to maintain spreads of at least $0.25 by not posting quotes on odd eighths.”
DEFINITION
Spread refers to the disparity between the lowest ask price and the highest bid price.
While Christie and Schultz, as well as others, have theorized that tacit collusion caused the lack of odd-eighth quotes, other academics have pushed back. Professor Paul E. Godeck, for example, argues, “Economic theory does imply, however, that given the number of market makers and the lack of entry barriers, excess profits that would otherwise exist under the current trading structure would be competed away – if not on price, then along other margins.”
What do you think? Did NASDAQ market makers collude to eliminate odd-eighth quotes? See what our community members are saying before you vote.
How the Zero Theft Movement Fights Collusion
Through this article, we have covered collusion’s damaging effects to the economy and the public. Economic inefficiency, price fixing, lack of competition—these problems hurt all of us. It’s about time we did something about it.
On the Zero Theft Movement’s platform, citizens author theft proposals on our voting platform, and the community decides whether that investigation has convincingly proven (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically.
The ZTM community knows that many businesses, including some corporations, act ethically. We are trying to identify and expose crony capitalism and hold those involved accountable. That way, good people and businesses can properly thrive and enjoy the piece of the piece they’re all due.
Standard Disclaimer
The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.