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.


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.

  1. Fixing

    Fixing is the practice of arbitrarily setting the price of a ...
  2. Fixed Cost

    Fixed cost is an expense that remains the same regardless of ...
  3. Fixed Asset

    A fixed asset is a long-term tangible piece of property that ...
  4. Fixed Term

    Fixed term describes an investment vehicle, usually some kind ...
  5. London Spot Fix

    The London spot fix is a daily rate set of each precious metal ...
  6. EBITDA To Fixed Charges

    EBITDA To Fixed Charges is a ratio used to measure a company's ...
Related Articles
  1. Investing

    Debt Mutual Funds Vs. Fixed Deposits

    Learn about the advantages and disadvantages of debt-oriented mutual funds and fixed deposit accounts, including how each investment generates income.
  2. Small Business

    What are antitrust laws?

    Learn about antitrust laws or "competition laws." These statutes protect consumers from predatory business practices by ensuring fair competition exists.
  3. Trading

    How To Value Interest Rate Swaps

    Interest rate swaps are derivative instruments that enable counterparties to exchange fixed and floating cash flows.
  4. Investing

    The Insiders Who Fix Rates for Gold, Currencies And Libor

    The system by which benchmark rates are fixed for interest rates, currencies and gold is archaic - and, many would argue, deeply flawed.
  5. Investing

    Chief Economist on Stocks & Fixed Income

    Joe Davis, Vanguard's Global Chief Economist, shares his take on equities and fixed income in today's market.
  6. Investing

    Operating Leverage Captures Relationships

    Find out how fixed and variable costs interact to shed new light on old companies.
  7. Investing

    What's the FCCR?

    The fixed charge coverage ratio (FCCR) is an accounting calculation that shows a company’s ability to pay its fixed costs – expenses that generally do not vary with production level. This may ...
  8. Trading

    Top Exchange Rates Pegged to the U.S. Dollar

    From the end of World War II until around 1971, all countries in the IMF pegged their currencies to the U.S. dollar. Today, many still do.
  9. Retirement

    How To Use The 4-Box Strategy For Retirement Income

    In today's volatile market, Generation X can't sit around waiting for things to improve. Gen X must implement innovative strategies for retirement planning.
  10. Financial Advisor

    What You Should Know About Fixed Indexed Annuities

    Looking for a steadier investment vehicle? Meet the fixed indexed annuity, which is linked to an underlying market index like the S&P 500.
  1. What is the difference between fixed cost and total fixed cost?

    Learn what a fixed cost is, what a variable cost is, what total fixed costs are, and the difference between a fixed cost ... Read Answer >>
  2. How do you account for changes in the market value of various fixed assets?

    Understand how to account for changes in the fair market value of a company's fixed assets. Learn what accounting methods ... Read Answer >>
  3. What is considered to be a good fixed asset turnover ratio?

    Learn what the fixed asset turnover ratio is, how the ratio is calculated and how the fixed asset turnover ratio can be used ... Read Answer >>
  4. What are the main advantages of fixed income securities?

    Learn why the addition of fixed income securities are common among investors who are attempting to limit their exposure to ... Read Answer >>
  5. What are some examples of fixed assets?

    Learn the difference between fixed tangible assets and fixed intangible assets, and review examples of these two types of ... Read Answer >>
Hot Definitions
  1. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  2. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
Trading Center