Price Fixing - Explained
What is Price Fixing?
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Table of ContentsWhat is Price Fixing?How does Price Fixing Work? How does Price-Fixing Occur?Other Factors that Affect Price ChangesTypes of Price FixingAgreement to raise prices Freeze or lower prices Horizontal Vertical price-fixing The Legality of Price FixingThe Bottom LineAcademic Research on Price Fixing
What is Price Fixing?
Price fixing refers to a written or verbal agreement among business rivals that increases, reduces, or stabilizes a commodity or service's price. According to the antitrust law, the company is expected to come up with its own prices. It includes other terms that do not involve any agreement with a competitor. Under specific situations, the antitrust law makes price-fixing by businesses illegal. However, the government does not provide legal protection when it comes to price-fixing.
How does Price Fixing Work?
Basically, whenever consumers make choices, they expect prices to be determined by demand and supply and not by the agreement made among competitors. However, any moment the competitors unanimously agree to restrict competition, it automatically leads to high prices. For a price-fixing to happen, there must be a collusion between buyers or sellers. The reason for this is to ensure that there is well-coordinated pricing that has mutual benefit to the traders.
How does Price-Fixing Occur?
There are several ways in which price fixing occurs. They include the following:
- Businesses can decide to set their prices high, leaving consumers with no choice but to purchase at that price.
- They can also decide to sell goods or services at a common price
- By not placing a discount on the sales price that is below the decided minimum price
- By adhering to the list price specifications
- By not buying products or services from a supplier above the stated maximum price
- By engaging in cooperative price advertising
- By putting limits on discounts
- By Putting mandatory surcharges
- By adhering to standardized purchasers terms offered on financial credit
Other Factors that Affect Price Changes
It is important to note that price-fixing is not the only cause of changes in market prices. The changes in prices can sometimes be caused by other conditions in the market. For instance, the price of wheat may rise and fall at the same time without farmers having any prior agreement among themselves. Where drought leads to a decline in the supply of wheat, the affected farmers will definitely increase the price of the wheat. Also, when consumers increase their demand for a certain commodity, it causes the supply to be limited hence causing its price to be high. In addition, apart from prices, there are other terms that affect prices. They include:
- Shipping fees
- Discount programs
- Financial rates
On the other hand, scrutiny for antitrust may happen when there is a discussion among business rivals on the following issues:
- Prices in the present or future
- Policies related to prices
- Sales terms and conditions. This includes credit terms
- Allocation of sales areas or customers
Types of Price Fixing
Agreement to raise prices
This is where all the competitors in the market decide to increase the price of a product or service to a specific amount.
Freeze or lower prices
It involves the government's freezing prices in an attempt to fix prices. For instance, the government in the 1970s prevented inflation when it threatened to destroy the confidence of the consumers in the economy. It did this by fixing prices to prevent inflation. Note that freeze or lowering price is a tool used only when there is an ineffective monetary policy.
Horizontal price-fixing happens between competitors in a given product and services. It is more common in an organization that deals with Petroleum Exporting countries. The fact that it is the countries that fix the prices on the oil, it is the government that does and not commercial entities.
Vertical price-fixing happens to those in the supply chain. It may be between a dealer and an auto manufacturer. For instance, a manufacturer may force retailers to sell a product at a price it has set. Note that this type of price-fixing has for a long time been regarded illegal. Also, some manufacturers operate using vertical integration. A good example is Apple, which owns its stores. Apple has made it possible for it to remain in control of fixing prices on their products without it being regarded as illegal.
The Legality of Price Fixing
Generally, there is disruption with the normal laws of demand and supply when it comes to price-fixing. The monopolies gain a competitive edge over their business rivals. When this happens, it is the consumers who feel the impact of price-fixing. They may experience the following:
- High prices on products and services, making them pay higher prices to access a commodity
- It also reduces incentives for renovation
- Lastly, it raises entry barriers
Generally, price-fixing prevents competition in open markets. The reason is that businesses are not free to engage in market price competition. It violates the competition-related laws since price-fixing controls the prices in the market. Note that even with confirmation that there has been an agreement on prices among competitors, it is still illegal and can be charged as collusion. It can be under the Federal Trade Commission law to become prosecutable as it will be treated as a civil violation. Also, price-fixing is subject to prosecution when it comes to state antitrust laws.
The Bottom Line
Illegal price fixing happens when businesses agree to fix prices. Note that a single business may on its own decide to legitimately get the best prices from the market. It includes increasing prices in the general public. Also, there is no violation of price-fixing laws when businesses agree to operate at the same price without prior agreement. Nonetheless, there is a distinction between a business conforming to prices willingly and being forced to enter the price-fixing agreement. These two scenarios are what determines the legality of price-fixing.
Academic Research on Price Fixing