Definition
Collusion, which Korea's Monopoly Regulation and Fair Trade Act bans (Korea Fair Trade Commission enforces it), is an illegal agreement in which companies selling the same product or service secretly decide prices, output, or terms of sale together to avoid competing. When free competition disappears, companies make big profits with little effort, while consumers pay more and lose their choices. That's why the law strictly forbids it.
Why does collusion happen?
Picture two stationery stores near a school. They're competing for customers by cutting the price of a notebook from 1,000 won (about $0.75) to 700 won (about $0.50). Students love it. But the store owners are sweating, because this price war is eating into their own profits.
Then one night, the two owners meet in secret. "Let's stop fighting this hard. Starting tomorrow, we both charge 1,500 won." Now students have to pay the higher price no matter which store they go to. With no other choice, customers get ripped off.
When companies that should be competing join hands and rig the game like this, it's called collusion. They skip the hard work of innovating and cutting prices, and secretly team up to rake in big profits the easy way.
In a market with no real competitors, consumers lose money. Worse, nobody tries to build better products anymore, and the whole market gets sick.
A closer look
To be more precise, collusion isn't only about raising prices to the same level. Cutting the amount of a product made at factories on purpose, so it becomes scarce and prices climb, is also classic collusion.
There are other forms too. Companies might split up territories: "You sell only in Gangnam, and I'll sell only in Gangbuk." Or they might rig bids on big construction projects, agreeing to take turns winning the contracts. The forms differ, but the goal is always the same: get rid of competition.
For a market economy to work well, companies need to compete hard to offer better products at lower prices. That competition drives technological innovation and boosts consumer welfare.
But once collusion sets in, companies have no reason to sweat over cutting costs or developing new technology. And all the damage lands squarely on consumers, who end up paying high prices for low-quality products.
Why is collusion so hard to keep going?
On the surface, collusion looks like a perfect plan that benefits everyone involved. Inside, though, suspicion and the temptation to cheat are swirling around. If every other store keeps prices high, one store that quietly drops its price a little can sweep up all the customers and make a fortune.
Government agencies like the Korea Fair Trade Commission know this, so they run a powerful program called leniency (a self-reporting amnesty program). A company that meets certain requirements and is the first to confess and hand over evidence can have its fine reduced or even wiped out entirely, and can be exempt from being referred for criminal prosecution. The second company to report can still get a partial reduction.
When this system is in place, each owner starts to panic: "What if a rival reports us first, behind my back, escapes the fine, and leaves me holding the bag?"
This is the prisoner's dilemma. Companies rush to confess, and many collusion cases are exposed to the authorities through self-reports. Even a seemingly solid illegal bond cracks easily when people can't trust each other and everyone is looking out for themselves.
Common misconceptions
If companies didn't raise prices to exactly the same level, it isn't collusion.
Even without touching prices, deliberately cutting output to push prices up or splitting up sales territories also counts as illegal collusion.
Where you meet it
Gas stations secretly agree not to let local fuel prices fall below a certain level.
Construction companies bidding on an apartment project decide in advance to take turns winning contracts.
In one sentence
Collusion is an illegal secret deal in which companies avoid competition to make easy profits, and in the end it hurts consumers.