One of the basic assumptions of competition law is that rivalry between competitors is necessary to maintain effective competition and to benefit consumers. Collusion is a conspiracy meant to eliminate or reduce such rivalry (or have such effect) by manipulating prices, quantities, product features, innovation, or other market conditions, thus benefiting the colluders at the expense of consumer welfare. Collusion by definition is bilateral or multilateral conduct, as opposed to unilateral anticompetitive conduct such as abuse of dominant position. The classic form of collusion usually deals with colluding competitors, but collusion can also occur between parties who operate in different levels of the supply chain (such as manufacturers and distributors). Nonetheless, the aim of collusion is usually to eliminate or reduce competition between actual or potential competitors. Therefore, that is the focus of this definition.
Competition laws and economic literature distinguish between explicit collusion, tacit collusion, and concerted practices. Explicit collusion occurs when express communication and agreement (sometimes a mere understanding will suffice) exist, with the purpose or outcome of the reduction of competition. When carried out between competitors with respect to core elements of competition, the practice of explicit collusion is generally known as a “cartel”. Cartel practices may include direct or indirect fixing of prices or other commercial conditions, market allocation (including bid-rigging), limitation of production or technical development, and other practices that have a similar anti-competitive effect. Price fixing, bid rigging, market sharing and output restrictions are generally known as ‘hard core cartels’ and in many jurisdictions these practices are treated more strictly than other collusive practices.
Tacit collusion occurs when competitors behave in a parallel manner without explicit collusion. This phenomenon, sometimes referred to as “conscious parallelism”, is a unilateral practice in which a competitor matches its behaviour to that of other competitors without engaging in any form of communication or agreement. An example is increasing prices following a price increase by another competitor. Tacit collusion is considered to arise mainly in oligopolistic markets where a small number of operators act in a parallel manner due to the characteristics of that market, e.g., the existence of market leader(s), market transparency that allows the monitoring of competitors’ behaviour, high entry and transfer barriers, homogenous products, and diffused customers. Concerted practices reside somewhere between explicit and tacit collusion. They are situations in which a supra-competitive outcome is achieved with direct communication (such as the exchange of competitively sensitive information) or even subtle forms of signalling (such as public statements), but without an express agreement.
Explicit collusion between competitors is illegal pursuant to competition laws in jurisdictions worldwide.
Article 101(1) of the TFEU prohibits all agreements between undertakings, decisions by associations of undertakings, and concerted practices, whose object or effect is to restrict, prevent, or distort competition. Both explicit collusion and concerted practices may thus serve as independent infringements of Article 101(1). In particular, cartelistic practices such as price fixing, limiting production, control of production, and market sharing are considered unlawful. Arrangements forbidden by Article 101(1) may nevertheless be permitted under Article 101(3), if the parties demonstrate they will lead to economic efficiencies and that consumers will share in the resulting benefits. Cartelistic practices are usually impossible to justify.
In the US, Section 1 of the Sherman Act 1890 prohibits any arrangement or conspiracy that unreasonably restricts competition in a relevant market. Typical forms of explicit collusion (i.e., cartels, price fixing, bid rigging and market allocation) are considered inherently anticompetitive in nature and thus “per se” illegal, regardless of any possible justification. While in the EU cartels are subject to administrative enforcement, in the US they constitute a criminal offense for which the punishment might be imprisonment for the individuals involved.
Tacit collusion, i.e., conscious parallelism, is not generally considered unlawful in itself. To determine the existence of a cartel, competition laws in different jurisdictions usually require at least some form of agreement, mutual understanding, or concerted practice between competitors. Concerted practice is somewhat akin to tacit collusion in the sense that it does not require much evidence of explicit coordination. However, it does require an effective breach of a firm’s obligation to determine its market behaviour independently that must go beyond mere tacit collusion, such as direct communication between competitors.
Article 101(1) TFEU applies to written contracts, oral agreements, non-binding arrangements and understandings, and other types of informal collusion, including concerted practices. Some type of “concurrence of will” is nevertheless required, and therefore mere tacit collusion is not generally deemed to constitute a violation of Article 101(1). In Sukier Unie (1975, paras. 173-174), it was held that the requirement of each economic operator to independently determine its competitive policy “does not deprive economic operators of the right to adopt themselves intelligently to the existing and anticipated conduct of their competitors”. The Court, however, held that the independence requirement strictly precludes “any direct or indirect contact between such operators, the object or effect whereof is either to influence the conduct on the market of an actual or potential competitor or to disclose to such a competitor the course of conduct which they themselves have decided to adopt or contemplate adopting on the market.” In Ahlström Osakeyhtiö (1993, paras. 70-72), the Court held that parallel conduct cannot be regarded as furnishing proof of concertation unless concertation constitutes the only plausible explanation for such conduct. However, this is not to imply that tacit collusion in itself can be considered to be cartelistic behaviour, but rather that under extremely strict conditions, parallel behaviour may be evidence establishing classical explicit collusion under EU competition law.
Section 1 of the Sherman Act prohibits “every contract, combination in the form of trust or other-wise, or conspiracy”. In Interstate Circuit (1939 p. 226), it was held that an express agreement is not a prerequisite to an unlawful conspiracy, and thus a concerted practice may constitute a conspiracy in itself. However, conscious parallel behaviour itself is not considered a conspiracy and does not suffice to establish a claim under Section 1. In Twombly (2007, p. 557), the US Supreme Court ruled that “when allegations of parallel conduct are set out in order to make a §1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action”.
Israeli competition law resembles European law in the sense that it generally prohibits any bilateral or multilateral arrangement that may restrict competition, unless permitted due to the economic efficiencies it entails. Cartelistic practices are presumed to be inherently anticompetitive and thus illegal. As in the US, a cartel constitutes a punishable criminal offense. Concerted practices such as information exchange may also be deemed illegal if they might restrict competition, but are more likely to be enforced by administrative measures, unless their aim was to restrict competition between competitors. Tacit collusion, i.e., mere parallel conduct, is not considered illegal in itself.