What is explicit collusion?

Explicit collusion refers to a formal agreement between firms to coordinate their actions, typically with the aim of reducing competition and increasing their collective profits. This kind of arrangement often involves practices such as price-fixing, where companies agree on the prices they will charge for their products, or setting production limits to control market supply. By doing so, firms can operate more like a monopoly, leading to higher prices for consumers.

The option that suggests a joint decision-making process among companies is closely aligned with the concept of explicit collusion, as it emphasizes the coordinated efforts and agreements to influence market outcomes collectively. This contrasts with mere competition, where firms act independently, or a situation where they simply ignore each other's activities.

Formal agreements, which are characteristic of explicit collusion, are crucial because they indicate that firms are not acting in isolation but rather are intentionally coordinating their strategies to achieve mutual benefits. This is different from tacit collusion, where firms might indirectly coordinate their behavior without a formal agreement, and it's also distinct from competitive strategies where companies seek to outperform one another independently.