A Level Economics AQA Practice Exam

What does collusion refer to?

1. Open competition among firms

2. Secret agreements among firms

3. A public offering of set prices

4. Regulatory compliance in pricing

The correct answer is: Secret agreements among firms

Collusion refers to secret agreements among firms, typically in the context of oligopolistic market structures. In a collusive arrangement, firms work together to set prices or output levels in order to maximize their joint profits, rather than competing against each other. This behavior is generally aimed at reducing competition, which can lead to higher prices and lower output than would occur in a competitive market. Firms may engage in collusion covertly to avoid detection by regulators and to maintain higher profit margins, which would not be achievable in a competitive environment where companies lower prices to attract customers. It's important to highlight that collusion can lead to significant market inefficiencies and consumer harm, often resulting in legal repercussions for the firms involved when discovered. Other options describe concepts that do not fit the definition of collusion. Open competition refers to a market structure where firms compete freely without any agreements to fix prices or limit output. A public offering of set prices implies transparency and legality in pricing strategies, which is contrary to the secretive nature of collusion. Regulatory compliance in pricing implies adherence to laws and regulations designed to prevent anti-competitive practices, once again contrasting with the secretive and illegal nature of collusion.