Price fixing is an agreement between business competitors to sell the same
productThe noun product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced. Since 1695, the word has referred to "thing...
or service at the same price. Historically, such a group of businesses in price fixing was referred to as a
combination.
In general, it is an agreement intended to ultimately push the price of a product as high as possible, leading to
profitsIn economics, economic profit is the difference between a company's total revenue and its opportunity costs. It is the increase in wealth that an investor has from making an investment, taking into consideration all costs associated with that investment including the opportunity cost of...
for all the sellers. Price-fixing can also involve any agreement to fix, peg, discount or stabilize prices. The principal feature is any agreement on price, whether expressed or implied. For the buyer, meanwhile, the practice results in a phenomenon similar to
price gougingPrice gouging is a term for a seller pricing much higher than is considered reasonable or fair. In precise, legal usage, it is the name of a felony that applies in some of the United States only during civil emergencies...
.
Price fixing requires a conspiracy between two or more sellers; the purpose is to coordinate pricing for mutual benefit at the expense of buyers. Sellers might agree to sell at a common target price; set a common "minimum" price; buy the product from a supplier at a specified "maximum" price; adhere to a
price bookIn economics, a price book is a book in which the normal prices of an item are listed for all suppliers. This allows one to determine the lowest price possible....
or list price; engage in cooperative price
advertisingAdvertising is a form of communication used to influence individuals to purchase products or services or support political candidates or ideas. Frequently it communicates a message that includes the name of the product or service and how that product or service could potentially benefit the consumer...
; standardize
financial creditCredit is the provision of resources by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources at a later date. It is any form of deferred payment...
terms offered to purchasers; use uniform
trade-in allowancesDiscounts and allowances are reductions to a basic price of goods or services. They can occur anywhere in the distribution channel, modifying either the manufacturer's list price , the retail price , or the list price Discounts and allowances are reductions to a basic price of goods or services....
; limit
discountDiscounts and allowances are reductions to a basic price of goods or services. They can occur anywhere in the distribution channel, modifying either the manufacturer's list price , the retail price , or the list price Discounts and allowances are reductions to a basic price of goods or services....
s; 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
markupsMarkup is the difference between the cost of a good or service and its selling price. A markup is added on to the total cost incurred by the producer of a good or service in order to create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and...
; impose mandatory
surchargeA surcharge may mean:*an extra fee added onto another fee or charge** Fuel surcharge, sky freight charges which represents additions due to jet fuel prices.** Bunker adjustment factor, sea freight charges which represents additions due to oil prices....
s; purposefully reduce output or sales in order to charge higher prices; or purposefully share or "pool" markets, territories, or customers.
Generally, price fixing is
illegalLaw is a system of rules, usually enforced through a set of institutions. It shapes politics, economics and society in numerous ways and serves as a primary social mediator of relations between people. Contract law regulates everything from buying a bus ticket to trading on derivatives markets...
, but it may nevertheless be tolerated or even sanctioned by some governments at various times, particularly among those whose countries are developing economies. See also
CollusionCollusion is an agreement, usually secretive, which occurs between two or more persons to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage . It is an...
.
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 lossIn economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal...
.
United States and Canada
In the United States, price fixing can be prosecuted as a criminal federal offense under section 1 of the
Sherman Antitrust ActThe Sherman Antitrust Act requires the United States Federal government to investigate and pursue trusts, companies and organizations suspected of violating the Act...
. Prosecutions may be handled by the U.S. Department of Justice or by the
Federal Trade CommissionThe Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
. Many State Attorneys General also bring
antitrustUnited States antitrust law is the body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are designed to encourage competition in the marketplace....
cases and have antitrust offices, such as
VirginiaThe Commonwealth of Virginia is a U.S. state on the Atlantic Coast of the Southern United States. Virginia is nicknamed the "Old Dominion" and sometimes the "Mother of Presidents" because it is the birthplace of eight U.S. presidents. The geography and climate of the state are shaped by the Blue...
,
New YorkNew York is a state in the Mid-Atlantic and Northeastern regions of the United States and is the nation's third most populous. The state is bordered by New Jersey and Pennsylvania to the south, and Connecticut, Massachusetts and Vermont to the east...
, and
CaliforniaCalifornia is the most populous state in the United States, and the third largest by area. California is the second most populous sub-national entity in the Americas, behind only São Paulo, Brazil...
. Private individuals or organizations can bring their own lawsuits for triple damages for antitrust violations and also recover attorneys fees..
Colluding on price amongst competitors, also known as horizontal price fixing, is viewed as a per se violation of the Sherman Act regardless of the market impact or alleged efficiency of the action. In August of 2008, the U.S. Supreme Court ruled that vertical price fixing by a manufacturer and its retailers, also known as retail price maintenance, is not a per se violation.
Under American law, exchanging prices among competitors can also violate the antitrust laws. This includes exchanging prices with either the intent to fix prices or if the exchange affects 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. Experts generally advise that competitors avoid even the appearance of agreeing on price.
In Canada, it is an indictable criminal offence under section 45 of the Competition Act.
Bid riggingBid rigging is a form of fraud in which a commercial contract is promised to one party even though for the sake of appearance several other parties also present a bid. This form of collusion is illegal in most countries...
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. It does not matter if the price agreed upon is reasonable or for a good or altruistic cause; or if the agreement is explicit and formal or 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, banning price advertising, or agreeing to adhere to prices that one announces. 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.
Criticism on legislation
Economic libertarians claim that price fixing is inherently unstable and that regulation does more harm than good. A company can sometimes cheat on the cartel by secretly lowering its price and expand in the market. If there are low barriers to entry new firms may enter the market. Also, libertarians say that price-fixing legislation limits innovation because it discourages the creating of new, competing companies.
Price fixing in Australia
Price fixing is illegal in Australia under the Trade Practices Act, the provisions of which are broadly similar to the US and Canadian prohibitions. The Act is administered and enforced by the
Australian Competition and Consumer CommissionThe Australian Competition and Consumer Commission is an independent authority of the government of Australia. It was established in 1995 with the amalgamation of the Australian Trade Practices Commission and the Prices Surveillance Authority to administer the Trade Practices Act 1974...
.
Price fixing in New Zealand
New Zealand law prohibits price fixing, among most other anti-competative behaviours under the Commerce Act 1986. The act covers practises similar to that of US and Canadian law, and is enforced by the New Zealand Commerce Commission.
Price fixing in United Kingdom
British competition law prohibits almost any attempt to fix prices.
The
Net Book AgreementThe Net Book Agreement was a British fixed Book Price Agreement between publishers and booksellers which set the prices at which books were to be sold to the public....
was a public agreement between UK booksellers from 1900 to 1991 to sell new books only at the recommended retail price, in order to protect the revenues of smaller bookshops. The agreement collapsed in 1991 when the large book chain
DillonsDillons is a grocery supermarket chain based in Hutchinson, Kansas, and the flagship banner of Dillon Stores Division, one of the regional segments of The Kroger Company. Other banners under Dillon Stores Division include Gerbes in Missouri, Baker's in Omaha, Nebraska and Food 4 Less stores in...
began discounting books, followed by rival Waterstones.
http://books.google.com/books?id=-2LbVfzDfjwC&pg=PA275&lpg=PA275&dq=%22net+price+agreement%22+books&source=web&ots=wbq-9ED8bv&sig=yUAPMvVCikhSAb37wxLuHG5CIkE#PPA275,M1 http://query.nytimes.com/gst/fullpage.html?res=9D0CEEDD1E3FF934A35753C1A967958260&sec=&spon=&pagewanted=all
Price-fixing cases in the rest of the world
In countries other than the United States, Canada, Australia, New Zealand and within the European Union, price-fixing is not usually illegal and is often practised. When the agreement to control price is sanctioned by a multilateral
treatyA treaty is an agreement under international law entered into by actors in international law, namely sovereign states and international organizations. A treaty may also be known as: agreement, protocol, covenant, convention, exchange of letters, etc...
or is entered by sovereign nations as opposed to individual firms, the
cartelA cartel is a formal agreement among firms. It is a formal organization of producers that agree to coordinate prices and production. Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products...
may be protected from lawsuits and criminal
antitrustUnited States antitrust law is the body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are designed to encourage competition in the marketplace....
prosecution. This explains, for example, why
OPECThe Organization of the Petroleum Exporting Countries is a cartel of twelve countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular...
, the global
oilPetroleum or crude oil is a naturally occurring, flammable liquid found in rock formations in the Earth consisting of a complex mixture of hydrocarbons of various molecular weights, plus other organic compounds.The term "petroleum" was first used in the treatise De Natura Fossilium, published in...
cartel, has not been prosecuted or successfully sued under U.S. 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.
Under the EU commission's leniency programme whistleblowing firms which co-operate with the anti-trust authority see their prospective penalties either wiped out or reduced.
In October 2005, the
KoreaKorea is a civilization and formerly unified nation currently divided into two states. Located on the Korean Peninsula, it borders China to the northwest, Russia to the northeast, and is separated from Japan to the east by the Korea Strait....
n company Samsung pleaded guilty to conspiring with other companies, including Infineon and Hynix Semiconductor, to fix the price of dynamic random access memory (DRAM) chips. Samsung was the third company to be charged in connection with the international cartel and was slapped with a $300M fine, the second largest antitrust penalty in US history. In October 2004, four executives from Infineon, a German chip maker, received reduced sentences of 4 to 6 months in federal prison and $250,000 in fines after agreeing to aid the DoJ with their ongoing investigation of the conspiracy.
In 2006, the
Government of FranceThe government of the French Republic is a semi-presidential system determined by the French Constitution of the fifth Republic. The nation declares itself to be "an indivisible, secular, democratic, and social Republic"...
fined 13 perfume brands and three vendors for price collusion between 1997 and 2000. The brands include
L'OréalThe L'Oréal Group is the world's largest cosmetics and beauty company and is headquartered in the Paris suburb of Clichy, Hauts-de-Seine, France. L'Oréal has developed activities in the field of cosmetics, concentrating on hair colour, skin care, sun protection, make-up, perfumes and hair care. ...
(4.1mil euro),
Pacific Creation Perfumes (90,000 euro),
ChanelChanel S.A., commonly known as Chanel , is a Parisian fashion house founded by the late couturier Coco Chanel, recognized as one of the most chic in the haute couture...
,
LVMHLVMH Moët Hennessy • Louis Vuitton S.A. , usually shortened to LVMH, is a French holding company and one of the world's largest luxury goods conglomerates. It is the parent of around 60 sub-companies that each manage a small number of prestigious brands. These daughter companies are, to a large...
's
SephoraSephora is a chain of beauty product stores founded in France in 1969 and acquired by Paris-based conglomerate LVMH in 1997. The Sephora chain includes more than 750 stores in 21 countries...
(9.4mil euro) and
Hutchison WhampoaHutchison Whampoa Limited or HWL of Hong Kong is a Fortune 500 company and one of the largest companies listed on the Hong Kong Stock Exchange. HWL is an international corporation with a diverse array of holdings which includes the world's biggest port and telecommunication operations in its three...
's
Marionnaud (12.8mil euro).
http://www.businessweek.com/ap/financialnews/D8GBH2GO1.htm 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
lysineLysine is an α-amino acid with the chemical formula HO
2CCH
4NH
2. This amino acid is an essential amino acid, which means that humans cannot synthesize it. Its codons are AAA and AAG.Lysine is a base, as are arginine and histidine...
,
citric acidCitric acid is a weak organic acid, and it is a natural preservative and is also used to add an acidic, or sour, taste to foods and soft drinks. In biochemistry, it is important as an intermediate in the citric acid cycle and therefore occurs in the metabolism of virtually all living things...
, graphite electrodes, and bulk vitamins.
http://agecon.lib.umn.edu/cgi-bin/pdf_view.pl?paperid=5488&ftype=.pdf
In 2008 LG Display Co., Chunghwa Picture Tubes and Sharp Corp. have agreed to plead guilty and pay $585 million in criminal fines for conspiring to fix prices of liquid crystal display panels.
Seoul, South Korea-based LG Display will pay $400 million, the second-highest criminal fine the department's antitrust division has ever imposed. Chunghwa will pay $65 million for conspiring with LG Display and other unnamed companies and Sharp will pay $120 million, according to the Justice Department.
http://www.bloomberg.com/apps/news?pid=20601080&sid=aP1P0CBFZssE&refer=asia
In December 2008, the New Zealand Commerce Commission filed legal preceedings against 13 airlines in the New Zealand High Court. According to the Commission, the carriers "colluded to raise the price of [freight] by imposing fuel charges for more than seven years". The Commission noted that it may involve up to 60 airlines.
http://www.comcom.govt.nz/BusinessCompetition/Anti-competitivePractices/commercecommissionprocedureinaccor.aspx
See also
- FBI
- Price control
- Bid rigging
Bid rigging is a form of fraud in which a commercial contract is promised to one party even though for the sake of appearance several other parties also present a bid. This form of collusion is illegal in most countries...
- Collusion
Collusion is an agreement, usually secretive, which occurs between two or more persons to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage . It is an...
- Antitrust
United States antitrust law is the body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are designed to encourage competition in the marketplace....
- Cartel
A cartel is a formal agreement among firms. It is a formal organization of producers that agree to coordinate prices and production. Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products...
- Monopoly
In economics, a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it...
- Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek oligoi 'few' and poleein 'to sell'. Because there are few sellers, each oligopolist is likely to be aware of the actions of the...
- Variable pricing
Most firms use a Fixed price policy. That is, they examine the situation, determine an appropriate price, and leave the price fixed at that amount until the situation changes, at which point they go through the process again...
- Net Book Agreement
The Net Book Agreement was a British fixed Book Price Agreement between publishers and booksellers which set the prices at which books were to be sold to the public....
- Vendor lock-in
In economics, vendor lock-in, also known as proprietary lock-in, or customer lock-in, makes a customer dependent on a vendor for products and services, unable to use another vendor without substantial switching costs...
- Sherman Antitrust Act
The Sherman Antitrust Act requires the United States Federal government to investigate and pursue trusts, companies and organizations suspected of violating the Act...
- US Department of Justice
- Trade Practices Act 1974 (Australia)
The Trade Practices Act 1974 is an act of the Parliament of Australia. The act provides for protection of consumers and prevents some restrictive trade practices of companies. It is the key competition law in Australia...
- DRAM Price Fixing
In 2002, the United States Department of Justice, under the Sherman Antitrust Act, began a probe into the activities of dynamic random access memory manufacturers...
- Resale price maintenance
Resale price maintenance is the practice whereby a manufacturer and its distributors agree that the latter will sell the former's product at certain prices , at or above a price floor or at or below a price ceiling...
External links