Companies competing on product features, service levels, product quality and brand is universally healthy and generally benefits the most able. It provides increasingly better products and service levels to the consumer. Price competition taken too far, however, drives down quality and choice and inhibits innovation.
Tacit collusion between competitors keeps prices at a sustainably healthy level and, in the medium to long term, benefits the customer.
Overt collusion is banned in almost all free markets and is clearly anti-competitive. Words like ‘cartel’ have had their meaning stretched, from businesses that work together to Mafia-type connotations. Tacit collusion generally takes place in transparent (and historically local) markets where there is little differentiation on a product level.
The local petrol station is the obvious example:
- Why do all the petrol stations within 20 minutes drive all have pretty much the same price?
- Why is it that one always seems to move first?
- Why do the followers always then move within roughly the same period of time?
- Do they collude in advance? No.
- Is this tacit collusion? Absolutely.
In order for tacit collusion to thrive:
- The competitors need to recognise each other as competitors.
- They need to recognise the product (or service relationship between them) as being inferior or superior.
- And above all, they need to react consistently in their actions: the price leader needs to be certain the competitor will follow for tacit collusion to be in place.
Less obvious examples include house prices, and commercial building rents. Generally the threshold for entry and exit is high, leading the competitors to understand that they will be around together for a long time and best get along – love not war!
Tacit collusion has been judged legal over many investigations, as long as there are no agreements and no single entity or grouping holds unreasonable market power.
You might think that the bastion of proper behaviour would be the legal profession, surely no tacit collusion there. Yet annually, the august body that is The Law Society collates and summarises the average billing rate of each category of legal practitioner from the junior to the senior partner. This data is published for all members to consider. They may consider themselves a higher than average practitioner and charge more, or a local firm that charges less, but collude… they absolutely do.
Pricing gem:
Be consistent in your pricing and pricing PR. This gives the opportunity for others to collude to mutual benefit, even if you don’t know who you are colluding with!
