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Which of the following explains why two firms, Apex and Bongo, would engage in implicit collusion rather than explicit collusion?

A. Implicit collusion is less costly to both firms than explicit collusion; therefore, profits will be greater for both firms if they engage in implicit collusion.

B. Explicit collusion is illegal; if the managers of Apex and Bongo engage in implicit collusion, they may be within the law.

C. Implicit collusion allows Apex to increase its profits at the expense of Bongo without Bongo knowing that collusion has occurred; if Apex engages in explicit collusion, Bongo will realize collusion has taken place and retaliate against Apex.

D. Implicit collusion always has an enforcement mechanism that forces both firms to collude; explicit collusion does not have an enforcement mechanism.

Answer :

Final answer:

Firms Apex and Bongo would likely engage in implicit collusion over explicit collusion because explicit collusion is illegal. Engaging in implicit collusion may allow the firms to avoid legal trouble while still acting in a collusively, anti-competitive manner.

Explanation:

The most logical explanation as to why the firms Apex and Bongo might choose implicit collusion over explicit collusion is because explicit collusion is illegal (option b). This is based on antitrust laws designed to maintain market competition. Explicit collusion usually takes form as price fixing, output restraint, or dividing markets – activities that are prohibited by law. However, implicit collusion, although still anti-competitive, may not be legally actioned as there's no public evidence of an agreement.

Firms observe each other's actions, and make business decisions that tend to align with their competitors, often without a direct agreement or dialogue. This way, the firms avoid legal scrutiny while still benefiting from collusive behavior. But note, implicit collusion still raises ethical concerns.

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