Price fixing
Price fixing is an anticompetitive 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.
Not to be confused with fixed price or price controls.
The intent of price fixing may be to push the price of a product as high as possible, generally leading to profits for all sellers but may also have the goal to fix, peg, discount, or stabilize prices. The defining characteristic of price fixing is any agreement regarding price, whether expressed or implied.
Price fixing requires a conspiracy between sellers or buyers. The purpose is to coordinate pricing for mutual benefit of the traders. For example, manufacturers and retailers may conspire to sell at a common "retail" price; set a common minimum sales price, where sellers agree not to discount the sales price below the agreed-to minimum price; buy the product from a supplier at a specified maximum price; adhere to a price book or list price; engage in cooperative price advertising; standardize financial credit terms offered to purchasers; use uniform trade-in allowances; limit discounts; discontinue a free service or fix the price of one component of an overall service; adhere uniformly to previously announced prices and terms of sale; establish uniform costs and markups; impose mandatory surcharges; purposefully reduce output or sales in order to charge higher prices; or purposefully share or pool markets, territories, or customers.
Price fixing is permitted in some markets but not others; where allowed, it is often known as resale price maintenance or retail price maintenance.
Not all similar prices or price changes at the same time are price fixing. These situations are often normal market phenomena. For example, the price of agricultural products such as wheat basically do not differ too much, because such agricultural products have no characteristics and are essentially the same, and their price will only change slightly at the same time. If a natural disaster occurs, the price of all affected wheat will rise at the same time. And the increase in consumer demand may also cause the prices of products with limited supply to rise at the same time.[1]
In neo-classical economics, price fixing is inefficient. The anti-competitive agreement by producers to fix prices above the market price transfers some of the consumer surplus to those producers and also results in a deadweight loss.
International price fixing by private entities can be prosecuted under the antitrust laws of many countries. Examples of prosecuted international cartels are those that controlled the prices and output of lysine, citric acid, graphite electrodes, and bulk vitamins.[2]
Legal status[edit]
United States[edit]
In the United States, price fixing can be prosecuted as a criminal federal offense under Section 1 of the Sherman Antitrust Act.[3]
Criminal prosecutions must be handled by the U.S. Department of Justice, but the Federal Trade Commission also has jurisdiction for civil antitrust violations. Many state attorneys general also bring antitrust cases and have antitrust offices, such as Virginia, New York, and California. Further, where price fixing is used as an artifice to defraud a U.S. government agency into paying more than market value, the U.S. attorney may proceed under the False Claims Act.
Private individuals or organizations may file lawsuits for triple damages for antitrust violations and, depending on the law, recover attorneys fees and costs expended on prosecution of a case.[4][5] If the case at hand also violates the False Claims Act, in addition to the Sherman Act, private individuals may also bring a civil action in the name of the United States under the Qui Tam provision of The False Claims Act.
Under American law, exchanging prices among competitors can also violate the antitrust laws. That includes exchanging prices with the intent to fix prices or the exchange affecting the prices individual competitors set. Proof that competitors have shared prices can be used as part of the evidence of an illegal price fixing agreement.[5] Experts generally advise that competitors avoid even the appearance of agreeing on price.[5]
Since 1997, US courts have divided price fixing into two categories: vertical and horizontal maximum price fixing.[6] Vertical price fixing includes a manufacturer's attempt to control the price of its product at retail.[7] In State Oil Co. v. Khan,[8] the US Supreme Court held that vertical price fixing is no longer considered a per se violation of the Sherman Act, but horizontal price fixing is still considered a breach of the Sherman Act. Also in 2008, the defendants of United States v LG Display Co., United States v. Chunghwa Picture Tubes, and United States v. Sharp Corporation, heard in the Northern District of California, agreed to pay a total sum of $585 million to settle their prosecutions for conspiring to fix prices of liquid crystal display panels. That was the second largest amount awarded under the Sherman Act in history.[6]
Canada[edit]
In Canada, it is an indictable criminal offence under Section 45 of the Competition Act. Bid rigging is considered a form of price fixing and is illegal in both the United States (s.1 Sherman Act) and Canada (s.47 Competition Act). In the United States, agreements to fix, raise, lower, stabilize, or otherwise set a price are illegal per se.[9] It does not matter if the price agreed upon is reasonable or for a good or altruistic cause or the agreement is unspoken and tacit. In the United States, price-fixing also includes agreements to hold prices the same, discount prices (even if based on financial need or income), set credit terms, agree on a price schedule or scale, adopt a common formula to figure prices, ban price advertising, or agree to adhere to prices that are announced.[5]
Although price fixing usually means sellers agreeing on price, it can also include agreements among buyers to fix the price at which they will buy products.
Australia[edit]
Price fixing is illegal in Australia under the Competition and Consumer Act 2010, with considerably similar prohibitions to the US and Canadian prohibitions. The Act is administered and enforced by the Australian Competition & Consumer Commission. Section 48 of the Competition and Consumer Act 2010 (Cth) explicitly states, "A corporation shall not engage in the practise of resale price maintenance." A broader understanding of the statutory provision is in Section 96(3)of the Competition and Consumer Act 2010 (Cth), which broadly defines what can be resale price maintenance.
New Zealand[edit]
New Zealand law prohibits price fixing, among most other anti-competitive behaviours under the Commerce Act 1986. The act covers practices similar to that of US and Canadian law, and it is enforced by the Commerce Commission.[10][11]
European Union[edit]
Under the EU commission's leniency programme, whistleblowing firms that co-operate with the antitrust authority see their prospective penalties either wiped out or reduced.[12]
United Kingdom[edit]
British competition law prohibits almost any attempt to fix prices.[13]
The Net Book Agreement was a public agreement between UK booksellers from 1900 to 1991 to sell new books only at the recommended retail price to protect the revenues of smaller bookshops. The agreement collapsed in 1991, when the large book chain Dillons began discounting books, followed by rival Waterstones.[14][15]
However, price-fixing is still legal in the magazine and newspaper distribution industry, and sometimes in the motion picture industry.[16] Retailers who sell at below cover price are subject to withdrawal of supply. The Office of Fair Trading has given its approval to the status quo.
Exemptions[edit]
When the agreement to control price is sanctioned by a multilateral treaty or is entered by sovereign nations as opposed to individual firms, the cartel may be protected from lawsuits and criminal antitrust prosecution. That is why OPEC, the global petroleum cartel, has not been prosecuted or successfully sued under US antitrust law.
International airline tickets have their prices fixed by agreement with the IATA, a practice for which there is a specific exemption in antitrust law.[17]
It is more common to have price fixing trends during the bidding process, such as:
Impact of price fixing[edit]
When prices are determined between various companies, it may affect consumers' choices to a certain extent, and affect small businesses that rely on these suppliers.[34]
Taking freight as an example, many products are now transported by freight through various channels. If the freight price is artificially increased, it will have an impact on the entire supply chain. For example, it will cause the price of goods and services to increase, and it will also affect consumers' choices.[33]
Criticism on legislation[edit]
Economic liberals believe that price fixing is a voluntary and consensual activity between parties that should be free from government compulsion and government interference. At times price fixing ensures a stable market for both consumers and producers. Any short-term benefit of increased price competition will force some producers out of the market and cause product shortages and prices for consumers to rise. In the end price-fixing legislation forces producers out of a market because it can not compete with the biggest discounter and the market winds up a monopoly anyway.[35]