What is 'Price Fixing'
Price fixing is establishing the price of a product or service, rather than allowing it to be determined naturally through free-market forces. Antitrust legislation makes it illegal for businesses to decide to fix their prices under specific circumstances. However, there is no legal protection against government price fixing. In an ill-fated attempt to end the Great Depression, for example, Franklin Roosevelt forced businesses to fix prices in the 1930s. However, this action may have actually prolonged the downturn.
BREAKING DOWN 'Price Fixing'
Some economists believe antitrust laws are unnecessary because the free market already contains several built-in guards against price fixing. Consumers who believe that an item is priced unfairly high can do any of the following:
• Purchase a substitute good or service that is lower-priced
• Decrease their consumption for the good, making it unprofitable for businesses to keep prices fixed
• Buy the product from another country
Distrust among companies in a price fixing arrangement also acts as a barrier to continued manipulation. And, if all those fail, price fixing usually breaks down because of the power of large buyers to negotiate the price they are willing to pay.