What defines implicit collusion among firms?

Implicit collusion among firms is characterized by cooperation without formal contracts. This occurs when companies in a market behave in a way that resembles collusion, often leading to higher prices or reduced competition, but do so without any explicit agreements or arrangements. Instead of formally agreeing to set prices or control output, firms may tacitly recognize their interdependence and align their actions based on mutual understanding, market signals, or observed behaviors.

Firms may engage in implicit collusion when they realize that their pricing strategies will directly influence each other, and they can achieve better outcomes by avoiding aggressive competition. This can involve signaling through price changes or observing the market behavior of competitors. There is no need for direct communication or a formal agreement, which differentiates implicit collusion from other forms of market coordination.

In contrast, formal agreements to raise prices would be considered explicit collusion, which is illegal in many jurisdictions. A monopoly on production resources does not necessarily imply collusion but rather indicates control over resources by a single firm. Direct communication between competing firms suggests a more explicit and potentially illegal form of collusion rather than the subtler cooperation found in implicit collusion.