Collusion is an agreement between competing firms to coordinate their actions, so that together they can act as a monopoly to raise prices or limit production, in order to control the market (Sullivan and Sheffrin, 2003). It is most common in the form of cartels in an oligopolistic industry where an explicit agreement is made between the competing firms. However, in many regions of the world, cartels are illegal under competition laws (antitrust laws in the United States) because of the inefficiency generated. Despite this, cartels still persist (Scherer and Ross, 1990); the most influential of which is OPEC who keep international oil prices artificially high. Adam Smith (1776) said “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”. This quote from the eighteenth century underpins our modern day opposition towards cartels, but this in turn gives rise to tacit collusion. This is where two firms play a certain strategy without explicitly saying so, such as price leadership and parallel pricing as in the case of “The Great Salt Duopoly” which I will discuss further in this essay (Rees, 1993a). Tacit collusion is much more difficult to identify than overt collusion, and thus harder to punish the offending firms.

The most important factor facilitating collusion is the ability of firms to increase the market price, without significantly increasing competition (Carlton and Perloff, 2005). Certain conditions are favourable and mean the collusive behaviour is more likely to happen and be sustained. Such conditions include having a few large sellers who know each other well as it is easier to get an agreement on prices or output, a homogeneous good to make easy agreements on price, few or ideally no substitutes of the product so consumers do not switch consumption to another good, and an intangible good requiring repetitive purchases so the firms sustain higher profits (Meiklejohn, 2006). Normally in a market with a homogeneous good there are fierce price wars as rational consumers purchase the good from the firm with the lowest price, but successful collusion eliminates this and all firms involved are better off.

In the UK, the Competition Commission’s attention (previously the Monopolies and Mergers Commission) is directed at appraising the results of collusive behaviour as opposed to it being illegal per se as in the US (Rees, 1993a). If collusion is tacit there will be no evidence of communication, however communication is neither necessary nor sufficient for the existence collusion (Rees, 1993a).