Price Fixing, Types, Examples, and Why It Is Illegal

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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

There are four 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%. 

Freeze or 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 among competitors of 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 among 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.

Examples

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. But in 2007, it diverged significantly. That signaled 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.

Other Forms of Price Fixing

Price fixing isn’t simply confined to an agreement of setting the same price. Corporations can do a price fix by making a joint effort to:

  • Offer or withhold same discounts or shipping terms.
  • Establish a common formula for price changes.
  • Set a production amount, quota, or capacity.

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.

Although there are good reasons to make price fixing illegal, consumer choice can also render price fixing infeasible. If consumers find a product’s price to be unreasonable, they can simply lower demand for it by:

  • Opting for substitute products or services at affordable prices.
  • Purchasing the product outside the country.
  • Using collective consumer will to call for lower prices.

In these cases, market forces become built-in correctors for high price fixes. Sometimes, distrust among the price-fixing companies could dismantle their market manipulation. Buyers with large purchasing power could also force better terms and break price-fixing agreements.

Key Takeaways

  • Price fixing occurs when companies collude to set the price, discount, or production amount of a good or service, instead of allowing market forces to set it for them.
  • Price fixing is difficult to detect when the product or service is identical, such as corn and air cargo shipping.
  • Price fixing is illegal because it fosters unfair competition and imposes high prices on consumers.
  • Horizontal and vertical price fixing are the two most common types.