Price Fixing

What Is Price Fixing?

Price Fixing is an agreement (whether it may be in written form or orally spoken or it may be inferred from the conduct of same act) amongst the business rivals (i.e., competitors), that increases (very often), reduce (maybe for a short term), establishes or stabilizes (rare to happen) the prices disrespecting the prices governed by the flow of demand and supply in the market.

It is anyway not acceptable in any market scenario. More stringent laws are required to curb such practices. The competition bureau can conduct wiretaps, investigate calls and emails, analyze price movements, etc., to find the suspect price fixation. Consumers can purchase substitute goods or services or reduce the consumption of unrequired or non-essential commodities.

• Price Fixing is a written or oral agreement, or fixed from the performance of the same act amongst the business rivals (competitors) that increases frequently may be reduced for a short period, set up or stabilizes the prices not following the prices governed by the demand and supply flow in the market.
• Price fixation agreements, government orders to freeze prices, and horizontal and vertical price fixing are price-fixing methodologies. 
• Price fixing is not acceptable in any market design. Therefore, strict laws are needed to combat such practices.

How Does Price Fixing Work?

Normally, when consumers start buying a product in ample quantity in a short-term period (i.e., the demand is increased), the prices of those commodities will rise. On the other hand, if the demand is the same, but there are many suppliers for the same product (i.e., supply has increased), consumers get too many options to buy the same product & there occurs the negotiation & it eventually reduces the price of the product in the market. It is a simple explanation of how prices move as per demand & supply.

An increase in prices is a major concern for the Government. Assume in a situation where the demand has not increased, yet prices at all the competitors have increased abruptly (i.e., increased in stages or doubled at the moment). Here arises the suspicion that the price has been manipulated by competitors altogether. The result of pricing fixing is always higher prices.

This process is a strategy undertaken by the buyer and seller with the purpose of manipulating the prices for their own benefit. In some markets it is legal and is termed as resale price maintenance while many others view it as illegal.

Like price fixing economics, there are similar malpractices to reduce the competition, such as bid-rigging, market division, group boycotts, trade association, etc. Thus, the US has antitrust laws to reduce such illegal practices, because such a practice induces inefficiency in the market and also helps in transferring a part of the consumer surplus to the producer’s pocket.

Examples

Let’s see the following examples.

Example #1

Say there are two companies (say X Inc & Y Inc) which sell the same product at $ 25 each. That means only two competitors for the same product. The consumers are buying the products from both sellers. But now X Inc wants to attract more customers, reduces its price to $22 & eventually buyers get attracted to a relatively lower price. Observing this, Y Inc also reduced the prices at a lower price of $20. Eventually, consumers got attracted to Y Inc. If it goes like this, each company's gross profit will fall. So, both companies agreed to a price of $ 20 now, and after a few months, both will raise the price to $ 40. Consumers are indifferent between both products and are required to purchase the product anyway. Here, the law of demand & supply is disrespected, and the seller will charge as if it is a monopoly for them.

Example #2

Let's take a real-life example. In 2009, Amazon controlled the ebooks market due to the grand success of the Kindle. However, the publishers were not happy due to the lowering of prices. Amazon would sell ebooks at $ 9.99, even below what Amazon paid the publishers for those titles. The publishers were worried about cheap ebook sales. Later in January 2010, Apple decided to open bookstores for ebooks. Publishers were expecting Apple as a competitor for Amazon & hence agreed to negotiate prices. Later in 2015, it revealed everything, and Apple paid $ 430 million as per the US Supreme Court ruling.

Types

We will discuss price fixing economics here.

#1 - Price Fixation Agreements

Here the competitors agree to fix a price at their advantage. All competitors will increase the prices by the exact amount.

#2 - Government Order to Freeze Prices

When inflation has increased at higher levels, the Government may consider freezing the prices of essential commodities. Like in 2020, due to the outbreak of the CoronaVirus, governments worldwide have provided the maximum cap for sanitizers and self-hygiene products so that sellers don’t charge higher for these life-saving things. This is one of the types of price fixing laws.

#3 - Horizontal Price Fixing

It is the most generic type of price fixation. It means sellers for similar products increase the prices altogether. We can take the example of countries that export petroleum. The Central Government of those countries fixes the prices according to crude prices as per the price fixing laws. Such price fixation is allowed for Governments but not retailers of petrol pumps.

#4 - Vertical Price Fixing

It happens in supply chain management. The manufacturer of the end product agrees with the raw material supplier to raise prices to raise the prices of end products because input costs have been increased.

Signs Of Price Fixing

1. Tenders or quotes are a classic example of observing the signs of price fixing cases. All the tenders may provide a higher price than what is normally justified. Higher cost tenders are submitted by hiking the input costs.
2. Tenders don’t show detailed calculations for arriving at the prices. So, if a new supplier also charges the same amount as others, it shows signs of price fixation. Because usually, they should ideally drop prices once a new competitor enters the market. Thereby, this indicates collusion or agreed-upon prices among all the suppliers.

Why Is It Illegal?

• Laws are made on the logic of possible mischief or the latest experiences of fraud.
• Who would feel good paying an extra $ 50 every year for buying pizzas from any suppliers? A big NO! If the prices all over the market have increased due to an increase in bread, cheese, and other stuff, then it’s reasonable to accept the price move. Otherwise, it is one of the price fixing cases.
• Price fixation reduces competition. This only increases the cash reserves of the supplier at the same time providing low-quality things to consumers. If competition is reduced, we can see higher prices for lower quality products. Since price fixation hurts the consumers and the businesses, it is considered anti-competitive, and many fines are levied for such practices.
• The US has antitrust laws to reduce price fixation and other malpractices. It is highly important to do so, so that the situation does not get out of hand, giving the manufacturers a chance to use the situation for their on benefit.

Exceptions

1. Exception means it is allowed to some extent. Exceptions are always made for the benefit of the general public.
2. Price fixation is allowed when the Government wants to control the prices of essential commodities because if fixing is done to bring the price down, then it will help the government to control inflation.
3. Also, joint ventures are allowed to fix prices at their levels. Moreover, the pricing agreements between related parties are not considered price fixation.

Criticism

• Critics, however, support price fixing agreement by observing the benefits associated with the said agreements. They believe that there are ample cost savings and increased inefficiencies after an increase in supply.
• It eliminates uncertainties among firms and also reduces marketing mistakes.
• Another critic suggests that price fixation can move the prices to more competitive levels.

Advantages

• In the short run, it advantages the consumers due to lower prices in case the fixing is done to reduce prices.
• It helps the Government to control inflation at a level
• The government can pre-decide the should-be prices of most essential commodities.
• It helps to control the price fluctuations in regulated sectors because all producers cooperate in the procedure.
• Also, it is hard to prove the price fixing agreement, which is agreed upon in secret in private meetings. Also, there is no available evidence of such agreements on paper. The only evidence provided is by the insiders who dealt with such malpractices.

Disadvantages

In the long run, consumers have to suffer due to a price hike.

• In case price fixing is done to reduce prices, it means lower revenue. This results in Lower quality of products and services. Companies need to spend less on quality advancement and upgradation in order to compensate for loss in sale.
• There is a delayed in customer support from suppliers.
• Such agreements reduce the competitive environment in the market, thus hurting the market sentiments, because prices are no longer under the control of the natural market forces of demand and supply. consumers may stop the consumption of such goods altogether due to high prices or demand suddenly increases due to low prices.
• There is a rise in overall inflation during a shorter period. This is because of the sudden increase in the product prices and consumers are forced to buy them if they are necessities.
• Reduction in the consumption pattern of consumers then affects the whole market of the product. In the long run, the consumers try to adjust their consumption pattern by switching to some other similar products or avoiding its consumption if possible. This brings about a huge change in the entire market scenario.

Horizontal  Vs Vertical Price Fixing

• Horizontal Price Fixing occurs when it is done among the competitors. It is the most generic way of fixing prices. Generally, it is carried out through an agreement for maximum or minimum prices. In these cases, companies fix the prices at a higher level to earn higher gross profits. The consumer has no option but to buy at those higher prices.
• Vertical Price Fixing occurs when it is done along the supply chain. Generally, an agreement is made among the suppliers of raw materials, manufacturers of finished goods, distributors at all levels, and retailers. However, to avoid legal disputes, some manufacturers like Apple go around via vertical integration. Apple Inc operates through its stores (i.e., not dependent on the third party) to sell its product.

Frequently Asked Questions (FAQs)

Recommended Articles

This has been a guide to what is Price Fixing. We explain it with example, why it is illegal, differences between horizontal & vertical fixing & disadvantage. You can learn more about finance from the following articles –

• Unit Price
• Price War
• Price Sensitivity
• Offering Price