Is where firms follow a mutually beneficial, co-operative strategy without explicitly agreeing to do so. This type of collusion is more common amongst firms because collusion is strictly prohibited, this is seen as a more subtle way of colluding with firms and therefore a higher probability of avoiding detection.
Below is an example of the most common form of this type of collusion - price leaderhsip. This is where one firm takes up the role of the price maker, often called the 'leader'. Once this firm has set the price all the 'follower' firms then match this price. Firms can enjoy supernormal profit using this method because the 'leader' sets an extremely high price, that normally in the market would get undercut by rivals. But as all firms agree to match this price, consumers are forced to buy this product at a high price from any of these firms if they desire the good being sold in this market. As this is a form of collusion it is legally prohibited and often individual firms have an incentive to cheat to capture the entire market and steal supernormal profits. The logical chain of reasoning of this pricing strategy is shown below.
