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What is price fixing?
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In this article, I will break down the meaning of Price Fixing so you know all there is to know about it!
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What Is Price Fixing
Price fixing refers to an agreement among competing organizations on setting prices for their products and services.
The agreement can be in writing, verbal, or even inferred from their conduct.
In free markets, competing organizations will set prices using different pricing strategies to compete in the market fairly.
Free markets tend to bring the price for a product or service to a natural equilibrium.
However, competitors that fix prices are no longer setting prices based on supply and demand levels but they are manipulating the prices in such a way to either eliminate other competitors or maximize profits.
Consumers expect that companies set prices on their own.
However, price fixing occurs when competitors are actually working together to set prices and typically, that turns out to the consumer’s detriment.
When competing organizations collude to set prices, we’ll refer to that as horizontal price fixing.
On the other hand, when companies in the supply chain collude to set prices, we’ll refer to that as vertical price fixing.
In every jurisdiction, antitrust laws are designed to protect consumers and the market from price manipulations.
In the United States, the FBI and government agencies will investigate companies that are alleged to be price fixing.
If a group of people or companies are found to be price fixing, they can be criminally prosecuted and have to pay heavy fines.
Price Fixing Objectives
The main objective of price fixing is for competitors to raise the price of a product or service as high as possible in such a way that they can generate the highest possible profits.
Anticompetitive agreements can be reached by market participants on the same side where they attempt to fix prices, set discounts, or find a way to stabilize the market price.
When competing organizations conspire with one another to fix prices in such a way that natural market forces no longer help determine price, rather the price is set based on the will of the competing organizations working with one another.
In most price fixing schemes, whether it’s an agreement to raise, lower, or freeze prices, horizontal price fixing, or vertical price fixing, companies directly or indirectly act to alter normal market forces leading to higher profits to them to the detriment of other market participants.
The market participants that tend to gain in price fixing are those companies that are colluding with one another and those that lose are the competitors acting freely and customers or end-users.
Price Fixing Agreement
There are different types of situations that can lead to the authorities finding illegal price fixing activities.
The most obvious scenario is when there is a direct agreement among competitors to set prices either by establishing a minimum, a maximum, or even a range.
However, in practice, most price fixing activities are done secretly and may be more difficult to discover.
Very often, the authorities will look at circumstantial evidence to determine if two ore more competitors were behaving in a way that suggests there was a price fixing agreement among them.
For instance, if competing organizations happen to set the same price at almost the same time, that may be something to investigate.
If competitors happen to have the same type of contract terms or engage in similar patterns of activity leading to unlawful price fixing, that too can be the object of the investigation.
When competing firms directly or indirectly collaborate in such a way as to manipulate the market prices, that can constitute unlawful price fixing.
What Constitutes Price Fixing
Although “price fixing” refers to “price”, the notion of price fixing is not necessarily linked to setting prices directly.
Other types of activities that can affect prices are also considered price fixing.
Here are some examples of what can constitute price fixing activities when these activities are done by competitors:
- Setting credit terms
- Setting shipping fees
- Establishing specific types of warranties
- Establishing specific types of discounting programs
- Setting financing rates
- Putting similar bids
- Setting conditions on sales
- Separating the market by region among competitors
- Setting production quotas
- Collaborating on R&D plans
- Managing the promotions
As you can see, price fixing activities are not necessarily directly linked to the end price.
Any type of agreement or conduct allowing companies to manipulate their cost, capacity, production, distribution, promotions, or other, leading to the manipulation of the market prices can be considered as price fixing.
Antitrust Law Vilations
When competing companies are found working with one another to set prices, they can be criminally prosecuted.
The most typical defense brought by defendants is that there were no agreements, directly or indirectly, to manipulate the market prices in any way.
However, arguments that tend to justify their conduct are not acceptable defenses.
For instance, a competitor may justify its conduct by saying that the price that was set was reasonable or it had no choice but to work with the competitors to avoid going out of business.
In normal and free market conditions, competitors are not expected to “collaborate” or “work” with one another to determine what’s best for consumers or the market.
What is expected is that the natural competition among different firms within an industry lead to the stabilization of supply and demand along with market prices.
When the market’s natural balance is manipulated by competitors acting in their self-interest, you may violate antitrust law.
Price Fixing FAQ
Why is price fixing illegal?
Price fixing is illegal as it tends to disrupt the market forces leading to the natural stabilization of supply, demand, and prices.
When companies work together to set prices, they are giving themselves an unfair advantage over other market participants.
Also, consumers are ultimately the ones that are penalized as they are the ones that end up having to pay more for something that should have cost less or they no longer have competitive options on the market to choose from.
What is the difference between price fixing and predatory pricing?
Price fixing is a coordinated effort on the part of certain market participants to raise, lower, or freeze prices.
Typically, price fixing is considered as an illegal conduct in most jurisdictions.
On the other hand, predatory pricing is a pricing strategy that a company implements based on its sole initiative.
The objective is to set prices so low that other companies in the industry will not have the ability to match.
Predatory pricing is not an illegal activity to the extent it is not intended to eliminate competitors from the market.
What are the different types of price fixing?
There are four different types of price fixing schemes.
One price fixing scheme is when competitors agree to raise prices in such a way that a product will cost more in the market.
Another price fixing scheme is when competitors agree to freeze or lower their prices so that competitors cannot match the same price, ultimately driving them out of business.
You then have horizontal price fixing which is when competitors work in collusion to set prices (for example, companies in the oil and gas sector).
Then you have vertical price fixing which is when companies in the supply chain act in such a way to set prices for the goods produced (for instance, companies in car production supply chain).
What are examples of price fixing?
Price fixing can take different forms, such as:
- Companies setting the same retail price
- Setting a minimum sale price
- Setting similar discounts
- Setting maximum prices
- Using a price book or list price
- Offer same credit terms
- Limit discounts
- Set price markups
- Impose mandatory surcharges
- Reduce output
- Divided territories and markets
So there you have it folks!
What does price fixing mean?
In a nutshell, price fixing is when competitors reach an agreement where they set market prices either by lowering their prices, raising them, or manipulating other factors affecting the ultimate sales price.
In free markets, competitors set their prices based on various market forces and are primarily driven by supply and demand.
However, when competitors interfere with the market conditions in such a way that the price no longer reflects what it should represent in a free market, there may be price fixing concerns there.
There are antitrust laws (such as the Sherman Antitrust Act of 1890, Clayton Act of 1914, and the Federal trade Commission Act of 1914 in the United States) that have been enacted to protect consumers and the market from price fixing and the illegal
Now that you know what price fixing means and how it works, good luck with your research!
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