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Price fixing
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Price fixing is an agreement between business competitors to sell the same product or service at the same price.
In general, it is an agreement intended to ultimately push the price of a product as high as possible, leading to profits 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.
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Encyclopedia
Price fixing is an agreement between business competitors to sell the same product or service at the same price.
In general, it is an agreement intended to ultimately push the price of a product as high as possible, leading to profits 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 gouging.
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 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.
Generally, price fixing is illegal, 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 Collusion.
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.
United States and Canada
In the United States, price fixing can be prosecuted as a criminal felony offense under section 1 of the Sherman Antitrust Act. Prosecutions may be handled by the U.S. Department of Justice or by the Federal Trade Commission. Many State Attorneys General also bring antitrust cases and have antitrust offices, such as Virginia, New York, and California. 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 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. 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 conclude that price fixing is inherently unstable and regulation does more harm than good. Companies can easily cheat on the cartel by secretly lowering its price and expanding in the market. New firms can enter the market. Also, it 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 Commission.
Price fixing in United Kingdom
British competition law prohibits almost any attempt to fix prices.
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, in order 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.
Price-fixing cases in the rest of the world
In countries other than the United States, Canada, Australia 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 treaty or is entered by sovereign nations as opposed to individual firms, the cartel may be protected from lawsuits and criminal antitrust prosecution. This explains, for example, why OPEC, the global oil 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 Korean 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 France fined 13 perfume brands and three vendors for price collusion between 1997 and 2000. The brands include L'Oréal (4.1mil euro), Pacific Creation Perfumes (90,000 euro), Chanel, LVMH's Sephora (9.4mil euro) and Hutchison Whampoa's Marionnaud (12.8mil euro). 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.
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.
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