What is collusion?

Collusion occurs when firms in an industry cooperate, typically in secret, to coordinate their actions in a way that increases their collective profits, often at the expense of consumers and market competition. This might involve setting prices, limiting production, or dividing markets. By working together, colluding firms can achieve outcomes similar to those of a monopolist, thereby maximizing their joint profits while reducing consumer welfare.

In the context of the other choices, firms competing to lower prices is indicative of competitive behavior, which typically leads to lower profits for the firms involved. Individual firms controlling their own pricing suggests a competitive market where no collaboration exists, and prices are driven by supply and demand. Lastly, government intervention in price setting refers to external regulation, which contrasts with the secretive nature of collusion where firms are independently but illegally coordinating their strategies. Therefore, the essence of collusion is the cooperation between firms to enhance profits collectively, making the second option the accurate representation of this concept.