In contrast to cartels, which are inherent with formal agreements, conscious parallelism refers to the situation where no formal agreement, express or implied, has been reached by competing firms, yet prices or market allocations still appear to be fixed. Basically, these are pricing strategies among competitors in an oligopoly that occur without an actual agreement. One competitor takes the lead in raising or lowering its prices, and the others will follow suit with the understanding that profits will follow.
Conscious parallelism is not a per se violation of the Sherman Act. In fact, it can provide a valuable defense to a charge of price fixing or market allocation in that it is a way of explaining circumstantial evidence that points to anti competitive behavior. However, prosecutors can show a violation of the Sherman Act by showing the existence of one or more “plus factors,” which make it more likely that a corrupt agreement has been reached. For example, showing that firms are motivated to collude due to low profit margins would constitute a “plus factor” for the purposes of prosecuting an alleged price fixing scheme. Another plus factor is evidence that a firm has taken actions against its own economic interests. This indicates that rather than reacting to price changes as a market participant, the firm is playing their role in a concerted action among competitors and “taking one for the team.”
Tacit collusion practices such as price leadership are very common and hard to detect. Moreover, the line between criminal and non-criminal activity is hard to distinguish. The Antitrust Division looks for several indicators of collusion in such situations, including but not limited to:
- Uniform prices
- Penalty for price discounts
- Advance notice of price changes
- Information exchange
There can exist in the market many barriers to the effectiveness of conscious parallelism. For instance, a large number of competitors in a market would make it harder to reap the rewards of a higher price, since one firm might be reluctant to go along with the pricing strategy of the leader. Cost and demand differences could also contribute to undermine the effectiveness of tacit collusion, while firms that cheat on such agreements would also have this effect and trigger price wars, lowering prices even below the profitable level. Of course, such a strategy will also be affected by an economic recession, which decreases demand for many goods by decreasing the amount of money consumers have and are willing to spend.