Price Fixing, Types, Examples, and Why It Is Illegal
Price fixing is when two entities, usually companies, agree to sell a product at a set price. They do this to maintain profit margins. It's easiest for monopolies to fix prices. They operate without competitors that could offer products at lower prices.
Types of Price Fixing
Agreement to raise prices: All competitors agree to raise prices of a product by a certain amount. In 2012, the Cardozo Law Review published a study of 75 such situations. It found such agreements raise prices by 20 percent.
Freeze or even lower prices: Governments fix prices by setting price freezes. In the 1970s, inflation threatened to destroy consumers' confidence in the economy itself. The government fixed prices to stop inflation and restore confidence. It is a very clumsy tool and is only used when monetary policy has proven ineffective.
Horizontal price fixing: That is between competitors in a particular product. It was most famously done by the Organization of the Petroleum Exporting Countries. Although the countries do fix prices on oil, they are government, not commercial, entities. That makes them beyond the reach of U.S. antitrust laws, according to a 1979 U.S. District Court decision.
Vertical price fixing: It usually occurs between those in the supply chain, like an auto manufacturer and its dealers. For example, a manufacturer of a popular doll might use its clout to force its retailers to follow the "Manufacturer's Suggested Retail Price," and not offer sales or discounts. This type of price fixing has been illegal since 1911. That's thanks to the Supreme Court's decision in Miles v. Park when the Court said price fixing violated the Sherman Antitrust Act.
Some manufacturers get around this through vertical integration. For example, Apple has its own stores. That allows it to remain full-price without being accused of illegal price fixing.
1992: The Archer Daniels Midland Company fixed the price of lysine, an additive in corn and other animal feed, with its Japanese and Korean competitors. The whistle-blower, Mark Whitacre was played by Matt Damon in the 2009 film, “The Informant."
2006: At least 20 airlines were caught fixing the price of shipping international air cargo. They were fined $3 billion.
2010 to 2014: The government fined Bridgestone $425 million for its price fixing in car parts. The four-year investigation found 26 companies that agreed to fix prices. It included a wide array of products, including starter motors, seat belts, and 150 more parts. Companies agreed to $2 billion in fines. The European Commission charged another $1.3 billion on five makers.
2012: Banks fixed the world's second-most important interest rate. They included Barclays, UBS, Rabobank and the Royal Bank of Scotland. The Libor rate is the basis for most other interest rates throughout the world. It closely follows the world's most important rate, the fed funds rate. However, in 2007 it diverged significantly, signaling the start of the 2008 financial crisis. As a result of the price-fixing, Libor administration was switched over to the InterContinental Exchange in 2014.
2013: Apple was found guilty of price fixing e-books with major online publishers.
Why Price Fixing Is Illegal
Price fixing disrupts the normal laws of demand and supply. It gives monopolies an edge over competitors. It's not in the best interest of consumers. They impose higher prices on customers, reduce incentives to innovate, and raise barriers to entry. Overcharging costs consumers in poor countries as much as their countries receive in foreign aid.
Collusion has been illegal in America since the passage of the Sherman Act in 1890. But the nation’s enforcers started to get tough only when the brazenness of the lysine conspiracy became clear in the 1990s.