Rutgers Introduction to Microeconomics Practice Test

Collusion among firms occurs when they agree to coordinate their pricing and production strategies rather than competing against each other. This behavior is detrimental to market health primarily because it can result in artificial inflation of prices. When firms collude, they can set prices higher than they would be in a competitive market, diminishing the natural price-setting function that competition typically provides. This leads to higher prices for consumers, reduced choices in the market, and potentially a decline in overall market efficiency.

When firms work together to limit output or raise prices, it undermines the competitive pressures that typically drive innovation, efficiency, and lower prices. Instead of operating at a level determined by supply and demand, colluding firms create a scenario where prices are manipulated, directly harming consumers who face higher costs and fewer options for products and services.