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

Auto mechanics diagnosing a problem. Price fixing between Bridgestone and other auto supply manufacturers raised auto repair bills
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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. 

  • 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.

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 finding such agreements raise prices by around 37%.

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 oil prices, 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, following the Supreme Court's decision in Miles v. Park, holding that price fixing violated the Sherman Antitrust Act. 

Some manufacturers get around the issue through vertical integration. For example, Apple has its stores, which allow 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 21 airlines were caught fixing the price of shipping international air cargo. They were fined almost $2 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 the equivalent of $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 the 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 developing 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. However, 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 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 in a 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.

Frequently Asked Questions (FAQs)

What is the difference between price fixing and predatory pricing?

While price fixing in business typically involves collusion between competitors to set prices high, predatory pricing is a solo effort by a business to set prices so low that competitors are unable to match them. By itself, there is nothing illegal about lowering prices, but it becomes predatory when a business uses it to price competitors out of the market in order to gouge consumers in the future. Like price fixing, this is illegal, but it's not common.

Why aren't gas prices considered price fixing?

Generally, gas prices rise in unison within the same area in response to the same market conditions. However, there have been cases of price fixing and other antitrust violations among gas companies. Proving a price-fixing scheme would require evidence that companies had communicated and colluded in order to set prices, however.

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