Collusion
Plain definition
Collusion occurs when competing firms secretly or openly cooperate to set prices, restrict output, or divide markets instead of competing against each other.
In economics
Economists distinguish explicit collusion (a formal agreement, often illegal) from tacit collusion (parallel behavior with no direct contact, as in repeated oligopoly games). Game theory explains when collusion is sustainable through the threat of punishment.
Example
Two gas stations on the same road that agree by phone to both charge $4 per gallon are colluding; matching a rival's price publicly without any agreement is tacit collusion.
Collusion is often confused with a merger, but a merger legally combines firms into one company while collusion keeps firms separate while they secretly act together.