... is therefore natural for the firms to establish agreements between them to enforce alternative solution such that all firms are better off than in equilibrium (Luis and Cabral (2000), p127). This type of behaviour is referred to as collusion. Collusion is an agreement among a group of firms designed to limit competition among the participants. If all firms follow the agreement, buyers will face higher prices, giving the firms profits above the normal competitive level. From the welfare point of view collusion is not desirable. The optimal outcome that maximises total welfare is for the firms to price at marginal cost. Collusion allows companies to deviate from pricing at marginal cost and to transfer some consumer surplus into producer surplus. As a side effect dead weight loss occurs that reduces total surplus. In fact, this is the main consideration of regulators and policymakers against collusion in whole and price ...

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