What Is Fixing?
Fixing is the practice of setting the price of a product rather than allowing it to be determined by free-market forces. Fixing a price is illegal if it involves collusion among producers or suppliers to set the price of a product or service.
Fixing almost always refers to price-fixing, but it can be applied to other related factors. For example, the supply of a product can be fixed in order to maintain its price level or push it higher.
- Illegal fixing usually involves collusion among two or more producers of a product or service to maintain artificially high prices.
- It also may involve collusion to keep the prices they pay their suppliers artificially low.
- Some fixing, such as the currency peg, is legal.
In a free market, the price of a product or service is determined by the law of supply and demand. If the price is too high, plenty of people will be eager to produce it but few people will be willing to pay for it. If the price is too low, few will find it worthwhile to produce it and many will be eager to buy it. Eventually, economists tell us, the price will settle at a figure that is acceptable to both sides. That's the fair market value.
In its classic form, price-fixing is often a way to force consumers to pay more than they're willing to pay. It usually involves competitors getting together to secretly agree to keep their prices at a certain level, avoiding price competition that would hurt all of them financially.
Another form of price-fixing is an agreement among competitors to refuse to pay more than a set amount for a product or service. For example, if two or more large hospital groups secretly agree to pay no more than a certain price for medical supplies that all of them use, it might qualify as price-fixing.
The amount of the record fine paid by Swiss pharmaceutical giant Roche in 1999 to settle a charge of fixing vitamin prices in the U.S.
This is illegal in the U.S. As defined by the Federal Trade Commission (FTC), illegal price-fixing is a written, verbal, or inferred agreement among competitors that "raises, lowers, or stabilizes prices or competitive terms." Such cases are pursued as violations of antitrust laws.
Examples of Price-Fixing
One classic example of price-fixing was carried out in the 1970s by the Organization of Petroleum Exporting Countries (OPEC). The members of the organization, which controls much of the world's oil supply, agreed to severely cut back on the supply of oil available to its customers around the world. The result was massive shortages of oil and a quadrupling of its price to consumers.
OPEC is, by definition, a cartel. It is an association of suppliers formed with the intent of controlling the supply of a critical product in order to maintain its price for the welfare of all of its members.
Another notorious case of price-fixing led to a record U.S. fine. In 1999, the Swiss pharmaceutical giant Roche agreed to pay $500 million, then the largest criminal fine ever, to settle a price-fixing case related to the price of vitamins. A German competitor, BASF, was also fined while a French company escaped a penalty due to its cooperation with the U.S. Justice Department.
The Fixed Exchange Rate
A number of Caribbean and Latin American nations peg their currencies to the U.S. dollar, both to ease trade and tourism and to preserve their own currency stability. This form of price-fixing is a perfectly legal part of the global economy.