Fixing is the practice of setting the price of a product rather than allowing it to be determined by free-market forces. Fixing a price is illegal if it involves collusion among producers or suppliers.
While fixing almost always refers to price-fixing, it may also apply to other related contexts. For example, the supply of a product can be fixed in order to maintain its price level or push it higher.
Key Takeaways
- Fixing is the practice of setting the price of a product rather than allowing it to be determined by free-market forces.
- Fixing is illegal when it involves collusion among two or more producers of a product or service to maintain artificially high prices or keep the prices they pay their suppliers artificially low.
- Authorities define illegal price-fixing as any consensus that “raises, lowers, or stabilizes prices or competitive terms” among competitors.
- Some fixing, such as the currency peg, is legal.
The Dynamics of Fixing
In a free market, the price of a product or service is determined by the law of supply and demand. If the price is too high, plenty of people will be eager to produce it, but few people will be willing to pay for it. Conversely, if the price is too low, few will find it worthwhile to produce, and many will be eager to buy it. Eventually, the price will settle at a figure that is acceptable to both sides, leading to fair market value.
In its classic form, price-fixing often forces consumers to pay more than they’re willing to pay. It typically involves competitors covertly agreeing to keep their prices at a set level, avoiding price competition that could financially damage them all.
Another form is when competitors agree to not pay more than a set amount for a product or service. For instance, if multiple large hospital groups quietly agree to cap the price for medical supplies, it may qualify as price-fixing.
This is illegal in the U.S. and investigated under antitrust laws. Authorities define illegal price-fixing as a consensus that “raises, lowers, or stabilizes prices or competitive terms” among competitors.
Legal Implications of Price-Fixing
Enforcing antitrust laws aims to preserve fair competition and protect consumers. Laws like the Sherman Act prohibit agreements among competitors that restrain trade or fix prices. Authorities such as the Department of Justice (DOJ) and the Federal Trade Commission (FTC) actively enforce these laws and investigate allegations of anticompetitive behavior.
Engaging in price-fixing practices can lead to severe legal consequences, including fines, imprisonment, and reputational damage. Leniency programs encourage companies to self-report illegal activities and cooperate with investigations, potentially reducing penalties for those who come forward with information.
Impact on Economic Equilibrium
Price fixing disrupts the natural balance between supply and demand. In a competitive market, prices emerge through this interplay, stabilizing when demand matches supply. By artificially setting prices, price fixing disturbs this equilibrium, leading to mismatches between supply and demand and inefficiencies in the market.
Price fixing can deter innovation and competitiveness, as companies have less incentive to improve quality or cost-effectiveness. It also disrupts resource allocation, influencing how much and what a company produces.
Small Businesses and Entrepreneurs
Price fixing particularly harms small businesses and entrepreneurs who may lack the resources to cope with lower-than-competitive pricing set by larger competitors. When big companies fix prices, small businesses struggle to maintain competitive pricing, especially if the fixed prices are below their cost of production.
For entrepreneurs and startups, price fixing can obstruct growth and innovation by limiting their ability to remain competitive and deterring new market entries.
Types of Price-Fixing
Horizontal Price-Fixing
Occurs when competitors at the same level—such as rival companies or manufacturers—agree to set and maintain prices. This agreement can lead to increased prices, restricted output, or customer allocation among themselves.
Vertical Price-Fixing
Involves agreements between entities at different levels of the supply chain, like manufacturers and retailers. A manufacturer may control downstream prices by setting minimum resale prices or other tactics, impacting how retailers price products.
Reasonable Cases of Price-Fixing
Some contexts might justify fixed prices:
- Government Oversight of Essential Services: In industries like utilities or public services, price regulation ensures stability, affordability, and universal access.
- Internal Collaboration of Business Groups: Companies under common ownership may collaborate on pricing strategies, legal as they optimize internal operations.
- Legal Exemptions for Professional Associations: Fields like law or healthcare might establish fee schedules to ensure fair compensation, under strict regulations.
- Price Floors: Governments might set minimum prices for agricultural products to protect farmers from market volatility.
- Predatory Pricing Regulations: Regulatory bodies intervene to prevent predatory pricing, ensuring a fair competitive landscape.
- Customized Pricing Agreements: Custom pricing based on negotiated terms with individual customers is legal if not anticompetitive.
Real-World Examples
- Oil Crisis in the 1970s: Organizations like OAPEC agreed to cut oil supply, causing shortages and quadrupling prices.
- Pharmaceutical Fines: In 1999, Roche paid a record $500 million fine for vitamins price-fixing.
- Exchange Rate Fixing: Countries peg currencies to stabilize economies and ease trade, a legal form of price-fixing.
Legal Exceptions and Detection
While limited exceptions like government-regulated controls exist, most price-fixing agreements are illegal. Authorities use various methods, including whistleblower reports and market monitoring, to detect and investigate schemes. Collaborations within a single corporate group might involve internal pricing strategies but should not harm external competition.
Conclusion
Price fixing restrains healthy market competition and violates antitrust laws. Companies and individuals involved may face severe penalties. Understanding its impacts and legalities helps foster a more competitive market environment.
Related Terms: collusion, supply and demand, fair market value, equilibrium, competitive pricing.
References
- Federal Trade Commission. “Price Fixing”.
- Cornell. “Sherman Antitrust Act”.
- Federal Reserve History. “Oil Shock of 1973–74”.
- U.S. Department of Justice. “F. Hoffmann-La Roche and BASF Agree to Pay Record Criminal Fines for Participating in International Vitamin Cartel”.
- Economic Commission for Latin America and the Caribbean (ECLAC). “Exchange Rate Regimes in the Caribbean”.
