Price Fixing: Types, Examples, Why It's Illegal

auto repair
Price fixing between Bridgestone and other auto supply manufacturers raised your auto repair bills. Hero Images

Definition: 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 since 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. A recent study of 75 such situations, "Cartels as Rational Business Strategy: Crime Pays”, found that they typically raise prices by 20%.

 

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 OPEC. Although the countries do fix prices on oil, they are government, not commercial, entities. That makes them beyond U.S. anti-trust 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 really 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 vs Park when the Court said price fixing violated the Sherman Anti-Trust 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.

Examples

1992: ADM 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 twenty airlines were caught fixing the price of shipping international air-cargo. They were fined $3 billion.

2010 - 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 the prices of starter motors, seat belts, radiators, ball bearings, exhaust systems and up to 150 more parts. Companies agreed to $2 billion in fines. The European Commission charged another $1.3 billion on five makers. 

2012: Barclays, UBS, Rabobank, and the Royal Bank of Scotland, among others, fixed the world's second-most important interest rate. 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.

 (Source: Christopher Alessi, and Mohammed Aly Sergie,  "Understanding the LIBOR Scandal," Council on Foreign Relations, December 5, 2013. Matt Taibbi, "The Biggest Financial Scandal Yet," Rolling Stone, April 25, 2013.)

2013: Apple was found guilty of price fixing e-books with major online publishers. (Source: "Apple Found Guilty in E-Book Price Fixing Conspiracy," Time, July 10, 2013.)

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. One estimate suggests that overcharging costs consumers in poor countries around the same as those countries get in foreign aid. 

Collusion has been illegal in America since 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 apparent in the 1990s. (Source: "Cartels: Just One More Fix," The Economist, March 29, 2014.)