Definition: Collusion is an agreement between two or more companies to fix prices or keep supply artificially low in an effort to disrupt the market. In other words, it occurs when two or more companies work together to control the price or supply of a product or service in order to generate higher profits.
What Does Collusion Mean?
In the United States, colluding is illegal. Rival companies cannot work together to fix prices and control a market by driving out competitors or new companies trying to enter the market. Basically, companies or individuals that would be competing with one another under normal circumstances cannot work together to stifle competition in the free market.
There are numerous anti-trust laws that prevent all forms of collusion not just price fixing. For example, companies can’t collude by sharing insider information about costs, buying strategies, or distribution methods with one another with the intention of using this private information to affect or change the market. Basically, all companies must keep their dealings with other companies at an arm’s length and can’t use their power to influence the general level of market competition.
All of these types of collusion occur at the company level, but there are several different levels that this can take place. For example, employees can collude with one another to steal money or products from the company. This happens frequently in the retail industry where a manager looks the other way while a staff member steals clothing.
It also happens in the accounting and bookkeeping department where the bookkeeper and the person handling cash are fraudulently embezzling money from the company. These schemes typically involve one employee depositing less money than what was collected and the bookkeeper only recording sales for the money that was deposited. These employees work together in an effort to circumvent the safeguards and controls put in place by management.