Question

Explain why do some economists argue that recessions are partly responsible for a rise in the number of collusive agreements among businesses and merged firms?

Answer 1

Collusion is an agreement between businesses that often compete against each other in efforts to set the goods price in order to gain an advantage. During the period of recession, there is an increased tendency for businesses to enter into collusive agreements. German Banks, French Beef, Carbonless paper, Auctions Houses, are all cartels that were formed during downturns. From firms’ perspective, cartels might be attractive as they permit competitors to avoid the risk of bankruptcy ultimately by dealing with unexpected fall in demand and consequently industry’s excess capacity. Hence “crisis cartels” might occur as a response to the adverse conditions