Final answer:
Gentleman's agreements represent a form of covert collusion where parties informally agree on prices or market shares without a written contract, making it hard to prove and enforce legally. Examples include historical pacts like the Gentleman's Agreement of 1907 between the US and Japan and business practices like price-fixing among competitors.
Step-by-step explanation:
Gentleman's Agreements and Collusion
Gentleman's agreements are a type of covert collusion, occurring in social settings where products' prices are agreed upon and market shares are determined by competition. These agreements are based on trust and the mutual understanding of parties without any formal written contract.
Meanwhile, collusive activities can also manifest in more formalized forms such as cartels, where there is an explicit agreement among competing firms to control prices, limit supply, and restrict competition. Cartels, being formal agreements, provide concrete evidence of collusion and are thus easier to detect and prosecute than gentleman's agreements, which are informal and tacit.
The Gentleman's Agreement of 1907 was an informal arrangement between the governments of the United States and Japan. The U.S. agreed not to impose a formal ban on Japanese immigration, which it had done with Chinese immigrants, as long as Japan took measures to limit the emigration of its citizens to the U.S.
This historical instance shows an international form of a gentleman's agreement where formal regulations were avoided through a mutual understanding.
In the business context, tacit collusion often presents enforcement challenges due to the difficulty of obtaining hard evidence.
Firms may implicitly align with each other, understanding that cut-throat competition is detrimental to profits. As such, they may engage in price-fixing and market-sharing, which harms competition and consumer welfare. Ultimately, these covert practices can lead to market outcomes resembling those of a monopol