Price fixing is defined by the federal trade commission as an agreement between competitors to set prices, in such a way as to alter competition. This practice has been heavily limited, or legally eliminated by antitrust laws for generations, however, it is still commonly a problem around the globe. In fact, major technology manufacturer, LG, was fined $585 million for price fixing on their liquid crystal display technologies in 2008 (Lohr, 2008). However, the legality of price fixing is not the only reason it is bad; in fact price fixing is a pure unethical, and ultimately impractical means of doing business, which can ultimately lead to greater problems, and which is best avoided in its entirety.
First and foremost, in the United States, price fixing an be considered bad because it is a criminal offense (15 U.S. Code § 1). In the United States, price fixing is deemed illegal, and prosecuted according to section 1 of the Sherman Antitrust Act. As such, it is subject to the prosecution of the Justice Department, the investigation of the Federal Trade Commission, and the extended jurisdiction of every state attorney. In fact, most states have individual antitrust offices that specifically monitor and prosecute these kinds of fair-pricing violations.
In 1997, legal precedent was set, in the United States to define price fixing into two distinct categories: vertical price fixing, and horizontal maximum price fixing (Tsui, 2011). Vertical price fixing occurs when a company or manufacturer attempt to take control of the retail prices charged for the product they produce (Washburn, 2011). It involves an agreement entered into by multiple levels of handlers of the same product, for example oil companies and gas service providers are at different levels of the same product market, and so could enter a vertical agreement. This agreement is then considered price fixing if and when it restricts the market, or more specifically competition in the market.
Price fixing is also bad because, as a major legal liability, it can cost company’s a fortune in civil suits as well. Those private individuals or organizations that file lawsuits for antitrust violations are legally entitled to settlements for triple the estimated damages incurred as a result of the offending company’s actions, up to and including the cost of attorney fees, and the states cost of prosecution (APA, 2000).
So, for example, if a small business files litigation because of a large company’s antitrust violation, claiming that they lost $3 million as a result, they would be entitled to $9 billion in damages, in addition to reimbursement of all costs related to bringing the suit. This can lead to major profit losses for the company in a big case.
Price fixing is further, “bad” because it is unethical, because the act of collusion between companies ultimately results in the restriction of competition. It is what occurs when companies decide to try to avoid true competition with others in the market, instead, staging their own success through backdoor deals.
In addition to simply being illegal and unethical, price fixing is also ineffective, according to neo-classical economists (Caporaso & Levine, 1992). The agreements entered into are fragile, tedious, and only moderately effective at best. According to this economic theory, each individual business is best served by monitoring its supply cost as it relates to demand, and doing what it is capable of doing, or maximizing its own efforts, within a free and uncorrupt competitive market (Caporaso & Levine, 1992). Price fixing, by circumventing this process, may lead to profitable gains in the short term, it also limits potential growth over the long term (Caporaso & Levine, 1992). Thus the relevant approach for businesses should exercise control of the question how to I “make superior trades” or trade something good for something better, rather than working to limit the market, and avoid marketable improvement (Caporaso & Levine, 1992).
Price fixing is, most simply, a way to limit or control competition through the contracting of prices, or the building of cartels to control or limit competition in the market-place. This practice has been heavily limited, or legally eliminated by both American and International antitrust laws for some time, however, it is still a commonly litigated issue, and a tactic that has proven highly profitable, in certain cases. However, neo-classical economists and ethical business both hold that the practice of price fixing is ultimately only limitedly effective, and may limit profitability and growth over time. Ultimately, the legality, and limited success of price fixing is not the only reasons price fixing is bad; in fact price fixing is a purely unethical, and ultimately impractical means of doing business, which can ultimately lead to greater problems and major financial losses, and which is best avoided in its entirety.
References:
15 U.S. Code § 1 - Trusts, etc., in restraint of trade illegal; penalty. Retrieved from https://www.law.cornell.edu/uscode/text/15/1
APA. (2000, Feb.) “Be Careful About Antitrust Law.” Art Publishers Association Bulletin.
Caporaso, J., & Levine, D., (1992). Theories of Political Economy. Cambridge, UK: Cambridge University Press.
Lohr, S., (2008) “LCD makers fined $585 million for price fixing” The New York Times. Retrieved from http://www.nytimes.com/2008/11/13/technology/13iht-13panel.17777580.html?_r=0
Tsui, T. C. (2011) “Use of Contribution Margin in Determination of Price Fixing” Pace Int’l Law Review Online Companion 1 (11) Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1839223
Washburn, J., (2011). “Verticle minimum price fixing- still a problem?”. The Globe- Law Exchange International Newsletter. Retreived from http://www.gouldratner.com/Assets/News/Vertical%20Minimum%20Pricing.pdf
