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Collusion



Definition

Collusion in finance refers to an unethical and illegal agreement between two or more parties to limit open competition by deceiving, misleading, or defrauding others of their legal rights. This strategy is typically used to manipulate and control market prices or deceive investors. This malpractice can lead to theft, fraud, or legal penalties when detected.

Phonetic

The phonetic transcription of the word “Collusion” is /kəˈluːʒən/.

Key Takeaways

  1. Secret Agreement: One of the primary aspects of collusion is that it involves a secret agreement between two or more parties, often with the intention of deceiving or defrauding others. This may occur between companies, political entities, or individuals and is generally considered illegal.
  2. Anti-Competitive Behavior: In an economic context, collusion frequently refers to a scenario where businesses conspire to fix prices, manipulate markets, or otherwise stifle competition. This behaviour can lead to higher prices and less choice for consumers, thus violating anti-trust laws.
  3. Punishment and Legal Consequences: Collusion is heavily punished under law due to its illegal nature and its potential to cause harm to individuals, competitors, and the economy as a whole. Penalties may include hefty fines, imprisonment, and severe damage to reputation.

Importance

Collusion is a crucial term in business/finance because it refers to an unethical and illegal practice in which two or more competitors make secret agreements to manipulate competition, such as fixing prices or dividing markets. These actions distort market forces, lead to higher prices, reduce product quality, and violate both competition law and free-market principles. Collusion can have detrimental effects on consumer welfare, economic efficiency, and market fairness. Therefore, it’s essential for regulatory bodies and businesses to understand and be vigilant against such practices to maintain a healthy, competitive business environment.

Explanation

Collusion, in the realm of finance and business, refers to a secret or unlawful agreement between firms, often competitors, to deceive, mislead, or defraud others, particularly consumers, of their rights, or to obtain an unfair market advantage. The primary purpose of such actions is almost always financial gain. By coordinating their efforts, these firms can manipulate market conditions to their benefit, often at the expense of others. Collusion often involves practices like price-fixing, bid-rigging, or market allocation, which undermine the notion of fair competition and may lead to increased prices or reduced product quality for consumers.The manipulative tactics employed by colluding parties have powerful implications. For instance, in a scenario of price-fixing, firms collectively decide on a price to be maintained within the market, eliminating the natural market forces of supply and demand which typically help regulate pricing. Meanwhile, in bid-rigging, competing firms pre-arrange who will win a bid, thereby obstructing the open competition that ought to occur. These activities serve the primary purpose of increasing the colluding firms’ profits while customers face the brunt of these unfair practices. Therefore, many countries have strict laws and heavy penalties established to deter businesses from engaging in these type of economic collusion.

Examples

1. Price Fixing in The Airline Industry: In 2019, British Airways was fined £183 million by the Information Commissioner’s Office for a data breach that affected about half a million of its customers. While this is not a direct example of collusion, between 2004 and 2006, British Airways was involved in a price-fixing scandal alongside Virgin Atlantic. Both airlines had colluded to raise fuel surcharge prices. Virgin Atlantic blew the whistle on the collusion, avoiding fines, but British Airways was fined £121.5m by the Office of Fair Trading and the U.S. Department of Justice.2. The Libor Scandal: In 2012, major banks such as Barclays, Deutsche Bank and UBS were fined billions of dollars for colluding to manipulate the London Interbank Offered Rate (Libor), a key interest rate that underpins trillions of dollars in global transactions. Traders at these banks communicated via email and instant messages to manipulate the rates to their favor, showing a clear case of collusion.3. Tech Industry Wage Collusion: In 2015, Apple, Google, Intel and Adobe systems agreed to a $415 million settlement over a lawsuit accusing them of colluding to avoid poaching each other’s employees thereby keeping wages lower. The antitrust lawsuit was filed by employees of these companies suggesting that the collusion impacted their salaries and job mobility.

Frequently Asked Questions(FAQ)

What does collusion in business term mean?

Collusion refers to a secret or illegal cooperation or conspiracy with the goal of deceiving others, often in a business context to manipulate market prices or engage in fraudulent activity.

Is collusion always illegal?

Not always, but in most contexts related to business practices, like price-fixing, bid-rigging, or dividing markets, collusion is considered illegal due to its anti-competitive nature.

Can you provide an example of collusion?

Yes, a common example is when multiple businesses that sell the same product secretly agree to keep their prices high, reducing competition and leading to increased prices for consumers. This practice, known as price-fixing, hurts consumers and violates antitrust laws.

How is collusion detected in the business world?

Detecting collusion can be challenging, but regulators and investigators often look for signs such as parallel pricing, shared geographical territories among companies, abnormal profits, and unusual bidding patterns in auctions.

What are the consequences of collusion?

If proven and convicted, colluding companies can face severe financial penalties, possible dissolution, and those individuals involved can face fines or even imprisonment.

What actions can be taken to prevent collusion?

Increasing competition, implementing strong antitrust laws, encouraging whistleblowing, and effective monitoring of market trends can work as preventive measures against collusion.

Does collusion only occur among large corporations?

No, collusion can occur in corporations of any size, and among individuals as well. The size of the company doesn’t determine the probability of collusion.

Can collusion have any positive effects on the market?

While some argue that collusion can lead to better product quality or increased market stability, the overall consensus is that these potential benefits do not outweigh the negative impacts, such as higher prices, decreased innovation, and economic inefficiencies.

Related Finance Terms

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