Pearson Edexcel · A-Level · Economics B

    Course version: 9EB0 · Version from Sept 2015

    Oligopoly: c) Tacit agreement

    Tacit agreement, or tacit collusion, occurs in an oligopoly when firms independently choose to avoid price competition without any formal or explicit communication.

    Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .

    • Point 3 of 4
    • 2 key terms

    Study notes

    From the checked teaching notes for this specification point.

    The idea

    Tacit agreement, or tacit collusion, occurs in an oligopoly when firms independently choose to avoid price competition without any formal or explicit communication. Because explicit collusion is illegal, firms observe each other's behaviour and align prices to maximise joint profits. A common method is price leadership, where a dominant firm sets a price and rivals follow suit. This reduces price wars and increases industry profitability. However, tacit agreements are unstable; firms have a strong incentive to cheat by secretly lowering prices to capture market share. Regulators like the Competition and Markets Authority find tacit collusion difficult to prove because there is no documentary evidence of an agreement.

    What earns the marks

    • Definition of tacit agreement as unspoken, unwritten cooperation between firms to limit competition.
    • Identification of price leadership as a primary mechanism for tacit collusion.
    • Explanation of the motivation: to maximise joint profits and avoid destructive price wars.
    • Recognition of the instability of tacit agreements due to the incentive to cheat.
    • Understanding that tacit collusion is difficult for competition authorities to prosecute due to a lack of evidence.

    Common mistakes and how to put them right

    • Mistaking tacit agreement for explicit collusion.

      Put it right: Tacit agreement involves no formal communication or contract, whereas explicit collusion involves direct communication.

    • Assuming tacit agreements are legally binding.

      Put it right: They are informal and rely on mutual observation, making them legally unenforceable and unstable.

    • Believing tacit collusion only occurs in monopolies.

      Put it right: It is a characteristic behaviour of oligopolistic markets where firms are interdependent.

    Exam tips

    • Use price leadership as your primary example when explaining how tacit agreements function in practice.
    • Emphasise the concept of interdependence when discussing why firms in an oligopoly might engage in tacit collusion.
    • Contrast tacit agreement with cartels to demonstrate a clear understanding of the legal distinctions in competition law.

    Try the lesson

    The start of the Oligopoly: c) Tacit agreement lesson, made from checked teaching notes for this specification point.

    Have a go first

    What is meant by a tacit agreement in the context of an oligopolistic market?

    Listen

    Tacit agreement, or tacit collusion, occurs in an oligopoly when firms independently choose to avoid price competition without any formal or explicit communication. Because explicit collusion is illegal, firms observe each other's behaviour and align prices to maximise joint profits. A common method is price leadership, where a dominant firm sets a price and rivals follow suit. This reduces price wars and increases industry profitability. However, tacit agreements are unstable; firms have a strong incentive to cheat by secretly lowering prices to capture market share. Regulators like the Competition and Markets Authority find tacit collusion difficult to prove because there is no documentary evidence of an agreement. A strong answer earns marks for these points. Definition of tacit agreement as unspoken, unwritten cooperation between firms to limit competition. Identification of price leadership as a primary mechanism for tacit collusion. Explanation of the motivation: to maximise joint profits and avoid destructive price wars. Recognition of the instability of tacit agreements due to the incentive to cheat. A common slip: Mistaking tacit agreement for explicit collusion. Instead, tacit agreement involves no formal communication or contract, whereas explicit collusion involves direct communication. Exam tip: Use price leadership as your primary example when explaining how tacit agreements function in practice.

    See it

    A top-down flowchart. It starts with a node reading 'Oligopoly: firms interdependent', which leads to 'Explicit collusion is illegal'. That leads to 'Firms observe each other's behaviour', which leads to 'Tacit agreement: avoid price competition without formal communication'. From this tacit agreement node three branches emerge. The first goes to 'Price leadership: dominant firm sets a price, rivals follow', which leads to 'Reduces price wars and increases industry profitability'. The second goes to 'Incentive to cheat by secretly lowering prices to capture market share', which leads to 'Tacit agreements are unstable'. The third goes to 'No documentary evidence of an agreement', which leads to 'Regulators such as the CMA find tacit collusion difficult to prove'.
    This shows how tacit agreement arises in an oligopoly through price leadership, why it is unstable, and why regulators find it difficult to prove.

    Key words

    Say what each word means before you turn the card.

    Tacit agreement

    Try answering aloud or in your head before turning the card.

    Price leadership

    Try answering aloud or in your head before turning the card.

    See every definition
    Tacit agreement
    Unspoken, unwritten cooperation between firms in an oligopoly to limit competition, without any formal or explicit communication.
    Price leadership
    A method of tacit collusion where a dominant firm sets a price and rivals follow suit.

    Label the diagram

    Some boxes have lost their names. Pick the right name for each number.

    The diagram again, with 3 boxes numbered instead of named. A top-down flowchart. It starts with a node reading 'Oligopoly: firms interdependent', which leads to 'Explicit collusion is illegal'. That leads to 'Firms observe each other's behaviour', which leads to 'Tacit agreement: avoid price competition without formal communication'. From this tacit agreement node three branches emerge. The first goes to 'Price leadership: dominant firm sets a price, rivals follow', which leads to 'Reduces price wars and increases industry profitability'. The second goes to 'Incentive to cheat by secretly lowering prices to capture market share', which leads to 'Tacit agreements are unstable'. The third goes to 'No documentary evidence of an agreement', which leads to 'Regulators such as the CMA find tacit collusion difficult to prove'.

    • 1Box 1

    • 2Box 2

    • 3Box 3

    0 of 3 labelled

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