Final answer:
Collusion refers to when firms in an oligopoly work together to control output and maintain high prices, often forming a cartel. This behavior is deemed illegal as it reduces competition and consumer welfare.
Step-by-step explanation:
When firms bidding on a contract arrange among themselves who will win each contract and at what price, according to the Competition Act of 1985, this behavior is called collusion. In the context of market structures, particularly an oligopoly, collusion occurs when firms act together to control industry output, set higher prices, and split the resulting profits, inhibiting competition and acting similarly to a monopoly. A formal agreement among firms to collude is known as a cartel. These practices are considered restrictive and are typically illegal, as they reduce consumer choice and can inflate prices artificially. Oligopolies are defined by the interdependence of firms and the significant market power held by a few dominant ones, and while they cannot legally enforce such collusion, they may still engage in practices that simulate the effects of a monopoly without explicit agreements.