Definition
Price fixing is a practice in which businesses agree to sell the same product or service at a certain price, disregarding competition. It is often clandestine and done with the intent to inflate prices and is generally considered illegal due to its anti-competitive nature. This practice is viewed as detrimental to consumers and to an open and competitive market.
Key Takeaways
- Price Fixing refers to an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.
- The aim of Price Fixing is usually to increase the profits of all individuals who are part of the agreement. However, this practice is illegal in many countries because it disrupts free competition, leading to higher prices, and negatively affects consumers.
- Regulations and laws, such as antitrust laws in the United States, are imposed to prevent Price Fixing in order to maintain fair competition, consumer rights, and the integrity of the market.
Importance
Price fixing is an important financial term because it refers to an agreement between participants on the same side of a market to buy or sell a product, service, or commodity at a fixed price.
It is critical in the financial world due to its potential significant impact on the market balance, competition, and consumer prices.
When businesses agree to sell at a certain price, competition is reduced, potentially leading to higher prices for consumers – making it illegal in many jurisdictions.
Understanding the principle of price fixing allows regulators, business people, and consumers to monitor market behaviors, uphold fair trading standards, and guard against the adverse effects of such practices.
Explanation
Price fixing is a concept in economics where market competitors collude to set prices of a product or service instead of allowing market forces to determine it. This practice is geared towards stabilizing the pricing system and ensuring that all actors within the market have a fair and equal advantage. Often, it is used to prevent price wars that can potentially harm producers, yet it can also lead to higher prices for consumers if misused.
Price fixing can be the result of an agreement or understanding among competitors and is usually facilitated through direct negotiations or indirect means such as signals or joint actions. The primary purpose of price fixing is to ensure a sustainable profit margin for businesses in highly competitive markets where price wars could otherwise lead to bankruptcy for some operators. It’s particularly prevalent among oligopolies – markets dominated by a few large sellers.
With price fixing, these companies can avoid intense competition and establish a stable, predictable market environment. That said, while price fixing can help ensure the survival of businesses, it is generally considered detrimental to consumers and against public interest as it often results in high prices and undermines the principles of free-market competition. Many countries have laws against it, considering it a type of anti-competitive behavior.
Examples of Price Fixing
LCD Price Fixing: One well-known instance occurred among LCD (liquid crystal display) manufacturers like Toshiba, LG Display, and Sharp. It was discovered that around the 2000s, these companies conspired to artificially set the prices of LCD panels at a high level to increase their profits, affecting their customers’ costs and violating free-market competition rules. After a substantial investigation, the companies faced multi-million dollar fines for their anticompetitive practices.
Airline Price Fixing: Around 2006, British Airways and Korean Air got into trouble for price fixing. They coordinated their prices for international flights to eliminate competition and keep prices artificially high. Both airlines were heavily fined by authorities in both the US and the UK.
eBook Price Fixing: In 2012, Apple was accused of colluding with five major publishing houses (Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster) to increase the price of eBooks and end Amazon’s dominance over the market. The US Department of Justice sued Apple and the publishers for price fixing, and they were ordered to pay a hefty settlement.
FAQs About Price Fixing
What is Price Fixing?
Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.
Are Price Fixing Arrangements Legal?
Price fixing is a major felony criminal offense under U.S. antitrust law. In addition, arrangements even to indirectly manipulate market conditions to create a price fixing effect can also be illegal.
What is the Impact of Price Fixing on the Economy?
Price fixing, if left unchecked, can lead to a variety of unwanted economic consequences. It tends to increase prices as it reduces competition amongst businesses. It may also lead to lower quality goods and services because there is no competitive need to improve.
How is Price Fixing Detected and Prevented?
Price-fixing cartels are difficult to detect, but the authorities, like the Commerce Commission, often receive complaints or tip-offs from the public or disgruntled cartel members. They also carry out market studies. The prevention is a collective effort by anti-monopoly laws and watchful regulatory authorities.
Related Entrepreneurship Terms
- Collusion
- Anti-Trust Laws
- Monopoly
- Market Manipulation
- Cartel
Sources for More Information
- Federal Trade Commission (FTC) The FTC is an independent agency of the United States government whose main mission is to enforce civil U.S. antitrust law and promote consumer protection. You can find information about price fixing under the enforcement and policy section on their website.
- U.S. Department of Justice The U.S Department of Justice is also a reliable source in terms of legal perspective and guidelines about the term. They cover the antitrust laws and principles including price fixing.
- Investopedia This is a reliable source for financial and investing information including an explanation of the term “Price Fixing”.
- Library of Economics and Liberty The Library of Economics and Liberty is dedicated to advancing the study of economics, markets, and liberty. It offers a wealth of information, including content related to the financial term “Price Fixing”.
