Price Fixing

What is 'Price Fixing'

Price fixing is setting the price of a product or service, rather than allowing it to be determined naturally through free-market forces. Although, antitrust legislation makes it illegal for businesses to fix their prices under specific circumstances, 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'

A business fixes price by colluding with one or more of its competitors to buy or sell goods and services at an agreed price. These companies usually fix prices at a horizontal or a vertical price. Horizontal price fixing occurs when companies decide to fix prices or price levels for a good or service at a premium or a discount. For example, several retail companies may fix the sale prices of television sets at a premium, thereby, earning higher profits. The retail companies may also agree to fix the prices of television sets at a discounted price. In this case, consumers will be more inclined to purchase from the colluded businesses than from businesses not involved in the sales manipulation.

Vertical price fixing occurs in the supply chain of production and distribution among manufacturers, wholesalers, and retailers. When manufacturers collude to set minimum resale prices, this is termed resale price maintenance. In this case, manufacturers may agree to not deal with retailers who offer their products at a discount or for rebate. Fixing minimum resale prices are inherently illegal in the US. On the other hand, an agreement among multiple manufacturers to set a maximum resale price is considered to be at least prima facie competitive since the resulting outcome is lower prices for consumers. In this case the court will judge whether the sales agreement made was illegal. Retailers who find the maximum fixed price burdensome can switch to a different manufacturer or supplier who is not in cohesion with the price fixing entities.

Cooperation among multiple entities to fix prices may still be tagged as price fixing even if the agreement made does not involve fixing the price itself of a good or service. Agreeing to - establish formulas for rates of change in prices; withhold or offer similar discounts; include the same shipping terms; set production of goods at a set quota or capacity; etc. are all activities that fall under price fixing. For example, the Organization of Petroleum Exporting Countries (OPEC) are notorious for fixing production levels for oil to keep oil prices high.

Legality

Price fixing runs afoul of federal and state competition laws as it stifles fair competition in the free market. When prices are fixed at a premium, the conspirators earn higher profits than businesses not involved in the scheme. Similarly, when price fixing is at a discount, businesses not in on the collusion efforts lose market share and sales. Because businesses are prevented from fairly competing against each other, price fixing is a criminal violation under the Sherman Antitrust Act federal law, a civil violation under the Federal Trade Commission (FTC), and a violation under state antitrust laws. In Canada, entities found guilty of price fixing are subject to imprisonment to a maximum term of five years, to a maximum of $10 million dollar in fines, or both.

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.

Price fixing is a manipulation scheme that is difficult to detect and prove since multiple companies having identical prices is not enough to prove that they colluded to fix prices. For example, the price of commodities, such as wheat, is almost always identical across various markets in the same region. This is because the products are virtually identical, and the demand and supply factors that affect one farm, most likely affect all other farms growing the same commodity within the same geographical region. For this reason, it is easiest for companies in a monopoly to fix prices, since they have no competitors that can counter their sales prices with lower ones.