Definition
Price fixing is an agreement between participants in the same market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions so the price is maintained at a given level. This action reduces competition and can occur between manufacturers, distributors, and retailers. Price fixing is illegal and considered an anti-competitive behavior in most countries due to its potential to damage the fair market and harm consumers through higher prices.
Phonetic
The phonetics of the keyword “Price Fixing” is: /praɪs ˈfɪksɪŋ/
Key Takeaways
<ol><li>Price Fixing is an agreement among competitors to raise, fix, or otherwise maintain the price at which their goods or services are sold. It not only affects the market competition but also exploits consumers who end up paying more.</li><li>Price fixing is considered illegal in many jurisdictions, due to its anti-competitive nature. It violates antitrust laws in places like the United States, European Union, and many other countries.</li><li>Detection and punishment of price fixing can be hard due to its secretive nature, but when detected, it often leads to severe penalties. These penalties can range from large fines to prison sentences for the individuals involved.</li></ol>
Importance
Price fixing is an important business and finance term because it refers to the unlawful practice where competitors collaborate or agree to maintain, control, or manipulate the price of goods or services, intentionally restricting fair competition in the market. This can lead to a lack of healthy competition, artificially high prices, reduced consumer choice, and a distorted economy. Governments and regulatory bodies often closely monitor and penalize price-fixing activities to protect consumers, maintain competitive markets and uphold economic justice. Understanding the concept of price fixing is essential for businesses to ensure legal and ethical trade practices, as well as for consumers to protect their rights to fair pricing.
Explanation
Price fixing is a strategy typically employed with the goal of stabilizing or controlling the price of a product or service within a market, often adopted by businesses in an attempt to manipulate market dynamics to their advantage. This practice is often utilized in situations where businesses, instead of competing against each other on the basis of prices, agree to sell a product or a service at a set price, which could be at a cost advantageous to them. This is commonly observed in oligopolistic market structures where a small number of large sellers dominate the market and keep prices artificially high to maximize their shared profits.However, the intended purpose behind price fixing can have drastic implications on the principles of fair trade and competitive markets. While businesses pursuing this strategy can enjoy stabilized profits and decreased risk, it predominantly disenfranchises consumers by limiting their purchasing choices and freedom. As a result, consumers often end up paying more than the competitive market price. Economies that favor free-market principles tend to have laws and regulations against price fixing due to its negative impact on competition and consumer welfare.
Examples
1. The Electronics Cartel:Between 1997 and 2005, several major tech corporations including LG, FastTrax, and Hitachi were found guilty of price fixing in the international market. These companies colluded to artificially inflate the prices of electronics goods – specifically, cathode ray tubes used in TVs and PC monitors – in a price-fixing scheme that lasted for nearly a decade. This resulted in high costs for consumers who purchased such items during this period. 2. The Global E-books Agreement:After the introduction of Amazon’s Kindle, several major book publishers were accused of price fixing in 2012. The publishers, including Hachette, HarperCollins, and Penguin, allegedly made agreements with Apple to set the prices of ebooks in their iBooks Store. This resulted in higher prices for consumers and triggered antitrust lawsuits.3. The Automobile Parts Price-Fixing Scheme:In one of the largest ever anti-trust settlements, numerous car parts manufacturers were involved in a widespread price-fixing conspiracy. From 2000 to 2010, it was discovered that over 100 different types of products – including seat belts, radiators, windshield wipers, air-conditioning systems, power window motors and power steering components – were fixed at high prices. Auto parts companies from Japan, Germany, Sweden, and France were part of this scheme, affecting prices of cars globally.
Frequently Asked Questions(FAQ)
What is price fixing?
Price fixing refers to an agreement between participants on the same side in the market to buy or sell a product, service, or commodity only at a fixed price. It is an illegal practice that interferes with the free market competition.
Is price fixing against the law?
Yes, price fixing is considered illegal under competition laws in several jurisdictions because it interferes with the natural market dynamics of supply and demand.
Which organizations regulate price-fixing activities?
Various organizations regulate price-fixing activities, most notably the Federal Trade Commission in the United States, the Competition Bureau in Canada, and the European Commission in the European Union.
What are some real-world examples of price fixing?
Examples could include gasoline stations agreeing to sell gasoline at the same price or major mobile operators agreeing not to undercut each other’s prices.
How is price fixing different from price collusion?
Price fixing is a type of collusion and hence both the terms are often used interchangeably. However, collusion can refer to a wider range of activities designed to limit competition, like dividing up markets or territories, whereas price fixing pertains specifically to the agreement on price points.
What does horizontal and vertical price fixing mean?
Horizontal price fixing involves competitors at the same level in the market while vertical price fixing occurs between sellers and buyers or manufacturers and retailers at different levels in the supply chain.
What are the consequences for companies involved in price fixing?
Legal consequences for price fixing can be severe, with possible penalties including substantial fines, imprisonment for individuals involved, damage to reputation, and the potential for lawsuits by those who might have been harmed by the price-fixing activities.
How can I report price fixing if I suspect it’s happening?
If you suspect price fixing, you should report it to your country’s competition authority. In the U.S., for example, you would report it to the Federal Trade Commission.
How does price fixing affect consumers?
Price fixing typically leads to higher prices for consumers as it interferes with the natural market competition that usually helps regulate prices. It can also reduce the quality and choices of goods or services for consumers.
Related Finance Terms
- Collusion
- Cartel
- Antitrust Law
- Monopoly
- Market Manipulation
Sources for More Information
- Federal Trade Commission
- Investopedia
- The United States Department of Justice
- Corporate Finance Institute
