Collusive (or price-fixing) agreements, whereby firms in an industry avoid competing with one another, play an important role in antitrust analysis. In this chapter, we focus on two important aspects of collusion. First, we shed some light on the incentives of firms to stay inside or outside of an explicit cartel; that is, we focus on cartel formation. Here, cartel members are assumed to jointly take their decisions. For such explicit cartels to work, firms must enter into (long-term) binding agreements so as to form a joint profit-maximizing entity. The main issues here are the formation and the stability of such cartels: what is their optimal and equilibrium size? We study these issues in Section 14.1.

Second, we analyse how cartels and other forms of collusion can be sustained in the absence of binding agreements. Here, collusion emerges as the noncooperative equilibrium of a situation of repeated competition. Because firms noncooperatively adopt strategies that lead to a coordinated outcome, collusion is said to be tacit. Since cartels are illegal, such tacit collusion is of particular importance for firms belonging to a cartel. For collusion to work, firms must have a correct ‘understanding’ of how other colluding firms will react to their behaviour. Therefore, the main issue in this second approach is the sustainability of tacit collusion: what is the set of prices that can be sustained in a noncooperative equilibrium when competition is repeated over time?