For each of the following industry practices, explain whether the practice supports the conclusion that there is tacit collusion in this industry.
For many years the price in the industry has changed infrequently, and all the firms in the industry charge the same price. The largest firm publishes a catalog containing a “suggested” retail price. Changes in price coincide with changes in the catalog.
This is evidence of tacit collusion. Firms in the industry are able to tacitly collude by setting their prices according to the published “suggested” price of the largest firm in the industry. This is a form of price leadership.
There has been considerable variation in the market shares of the firms in the industry over time.
This is no evidence of tacit collusion. Considerable variation in market shares indicates that firms have been competing to capture each other’s business.
Firms in the industry build into their products unnecessary features that make it hard for consumers to switch from one company’s products to another’s.
This is no evidence of tacit collusion. These features make it less likely that consumers will switch products in response to lower prices. So this is a way for firms to avoid any temptation to gain market share by lowering price. This is a form of product differentiation used to avoid direct competition.
Firms meet yearly to discuss their annual sales forecasts.
This is evidence of tacit collusion. Under the guise of discussing sales targets, firms can create a cartel by designating quantities to be produced by each firm.
Firms tend to adjust their prices upward at the same times.
This is evidence of tacit collusion. By raising prices together, each firm in the industry is refusing to undercut its rivals by leaving its price unchanged or lowering it. Because it could gain market share by doing so, refusing to do so supports the conclusion that there is tacit collusion.