Collusion

Collusion is a secretive and typically illegal agreement between two or more companies that are supposed to be competitors. Instead of battling it out for customers in the open market, they cooperate behind the scenes to gain an unfair advantage. Think of it as a corporate conspiracy to rig the game. The most infamous form is a cartel, where a group of producers bands together to act like a monopoly, jacking up prices and restricting supply to maximize their collective profits. This can involve price-fixing (all agreeing to sell at the same high price), bid rigging (taking turns winning contracts), or carving up territories so each company gets its own little monopoly. While this behavior might temporarily boost the companies' profits, it's terrible for consumers, who end up paying more for less choice and innovation. For investors, collusion is a giant red flag. It’s a business strategy built on a foundation of illegality and deceit, making any resulting profits incredibly fragile and subject to sudden, catastrophic collapse.

For a value investor, a company's ability to generate sustainable, long-term profits is paramount. Collusion is the very antithesis of this, as it creates an illusion of strength that can vanish overnight.

Successful long-term investing often involves finding companies protected by a wide competitive moat—a structural advantage that keeps competitors at bay. A moat can be a beloved brand, proprietary technology, or an unbeatable cost advantage. Collusion creates a fake moat. The high profits and stable market share it generates look attractive on a spreadsheet, but they aren't earned through genuine business acumen. They are stolen from the customer through illegal coordination. This “moat” is not durable; it's a sandcastle waiting for the tide of regulation or betrayal to wash it away. When the scheme is exposed, the fines, lawsuits, and loss of public trust will decimate the company's financials and market position, proving the moat was never real to begin with.

Spotting collusion from the outside is tricky, as it’s designed to be secret. However, certain industry patterns should make any prudent investor suspicious:

• Suspiciously Stable Prices: In a competitive market, prices should fluctuate. If prices across an entire industry remain strangely rigid or move in perfect lockstep for long periods, it could be a sign of coordination.
• Identical Price Hikes: Competitors all announcing identical, complex price increases at the same time, without a clear, industry-wide cost increase (like a spike in raw material costs) to justify it.
• Market Division: You notice that certain companies seem to “own” specific regions or customer types and never seem to compete on each other's turf.
• Too Good to Be True: An industry is enjoying exceptionally high profit margins for years without any major innovation or a clear competitive advantage to explain it.
• Regulatory History: The industry has a history of investigations or fines from antitrust authorities like the U.S. Department of Justice (DOJ) or the European Commission. Where there's smoke, there's often fire.

History shows that collusive agreements are inherently unstable and almost always end badly. There are two main reasons for this.

The core weakness of any cartel is simple human greed. In a concept known from game theory as the Prisoner's Dilemma, each member of the conspiracy has a powerful incentive to cheat. By secretly lowering its price just a little, one company can quickly steal a huge amount of market share from its co-conspirators. This temptation creates constant distrust, meaning the agreement is always one secret phone call away from imploding.

Modern market economies are built on the principle of fair competition, and governments defend it fiercely. Laws like the Sherman Antitrust Act in the United States give regulators the power to levy astronomical fines that can wipe out years of ill-gotten gains. Beyond the financial penalty, executives can face prison time, and the company suffers from crippling reputational damage that can last for a generation. The legal and financial risk associated with collusion is a massive, unquantifiable liability that should terrify any long-term shareholder.

A company that needs to cheat to win is not a high-quality business. It signals a lack of genuine innovation, a weak competitive position, and a corrupt corporate culture. A true value investor seeks out businesses that thrive by creating real value for their customers. Investing in a company you suspect of collusion is like betting on a fixed race—the outcome is not based on merit, and the entire enterprise could be shut down at any moment. Steer clear.