Price Fixing Definition Examples Is It Illegal

Price Fixing Definition

Explanation

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 marketPrice Of The Product In The MarketMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price.read more. 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.

Like pricing fixing, 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.

Examples of Price Fixing

Let’s see the following examples.

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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 profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more 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

Types of Price Fixing Methodologies

We will discuss it 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.

#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. 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 materialRaw MaterialRaw materials inventory is the cost of products in the inventory of the company which has not been used for finished products and work in progress inventory. Raw material inventory is part of inventory cost which is reported under current assets on the balance sheet.read more supplier to raise prices to raise the prices of end products because input costs have been increased.

Signs of Price Fixing

Tenders or quotes are a classic example of observing the signs of price-fixing. All the tenders may provide a higher price than what is normally justified. Higher cost tenders are submitted by hiking the input costs.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 a case of price fixation.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.

Exceptions to Price Fixing

Exception means it is allowed to some extent. Exceptions are always made for the benefit of the general public.Price fixation is allowed when the Government wants to control the prices of essential commodities.Also, joint ventures are allowed to fix prices at their levels. Moreover, the pricing agreements between related parties are not considered price fixation.

Criticism of Price Fixing

Critics, however, support price-fixing 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.

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 chainSupply ChainA supply chain refers to a process beginning with the procurement of raw materials and the production of finished goods and ending with their distribution and sale.read more. 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 integrationVertical IntegrationVertical integration is a corporate approach to take charge of its value chain or supply chain functions. It is the process of holding and managing the distributors, suppliers and retail locations at the company’s discretion.read more. Apple Inc operates through its stores (i.e., not dependent on the third party) to sell its product.

Advantages

In the short run, it advantages the consumers due to lower 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.Also, it is hard to prove the price-fixing, 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.

Lower quality of products and services.Delayed customer support from suppliers.Such agreements reduce the competitive environment in the market, thus hurting the market sentiments.Rise in overall inflation during a shorter period.Reduction in the consumption pattern of consumers then affects the whole market of the product.

Conclusion

Price fixing 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. On the other hand, consumers should not support such an all-of-a-sudden hike in the price of specific commodities. Consumers can purchase substitute goods or services in case of hike prices of other similar products or services. Consumers can reduce the consumption of unrequired or non-essential commodities. It is good to import the product from another country in a few cases.