Price Fixing

When consumers decide what products to buy, and where to buy them, it is with an expectation that the prices are based on supply and demand, as well as the need for retailers or service providers to compete in an open market for their business. When competitors in any market, whether retailers or providers of essential services, come together to set a certain price, it is considered “price fixing.” Price fixing may be used to set prices far enough below market prices to eliminate other competitors, after which the prices may be raised among all parties to the agreement to greatly increase income. To explore this concept, consider the following price fixing definition.

Definition of Price Fixing

Noun

  1. A conspiracy between competitors in business to set prices for their goods or services at a specific price point. Price fixing violates state and federal laws against business collusion.

Origin

1890 Outlawed by the Sherman Antitrust Act

History of Price Fixing and Other Anti-Competitive Practices

In the 1800s, the issues of large company monopolies, and collusion between business competitors to push prices as high as possible to make a large profit, had become a problem for U.S. consumers. In an attempt to prevent such anti-competitive business practices, Congress passed a piece of legislation that became the foundation for free competitive enterprise the United States enjoys today.

The Sherman Anti-Trust Act (the “Sherman Act”) was signed into law in 1890, by President Benjamin Harrison. The Sherman Act prohibits companies from entering into any agreement, contract, conspiracy, or trust that in any way seeks to restrain or fix interstate or foreign trade. Although the Sherman Act, on the surface, seems to apply to trusts, it actually states that:

“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.”

Regardless of the type of business entity committing the acts, price fixing and other anti-competitive business practices are against the law and subject to both civil and criminal penalties. For example, a person in violation of these antitrust laws may be imprisoned for up to three years, and fined up to $350,000 per violation. Because it is not possible to imprison a corporation, their fines are increased to $10 million per violation.

How Price Fixing Occurs

There are a number of things that businesses can do that are considered to be price fixing. The most obvious is that a group of competing businesses can agree to set their prices to the same high level, giving consumers no choice but to purchase the overpriced merchandise or service. Alternatively, a group of businesses could agree to set their sale prices, surcharges, or discounts at the same rate, which may have the effect of driving other competing companies out of businesses.

Another tack would be for the group of businesses to agree to a maximum price they are willing to pay when purchasing merchandise from wholesalers. This would force the wholesalers to lower their prices, as all of their usual customers have banded together and refused to pay the asking price.

Legitimate Sales Tactic vs. Illegal Practice

It sometimes seems there is a fine line between a business making a legitimate effort to increase its bottom line, and doing something that violates antitrust laws. An important thing to remember is that the illegal practice of price fixing can only occur when there is an agreement between businesses to fix prices, or to engage in some other illegal anti-competitive practice.

Any business may choose to make every effort to obtain the best possible profit, whether by raising their prices to a level others don’t consider appropriate or sustainable, or offering extremely low prices in an attempt to lure consumers to their doorsteps. In addition, businesses that offer the same prices on products or services as other businesses in the area, without an actual agreement, are not engaged in price fixing, but individually making business decisions.

Recognizing Price Fixing Schemes

When two or more competing businesses make an agreement to fix prices, whether at a maximum, minimum, or within a specified range, it is considered to be price fixing, and is illegal. Price fixing and other anti-competitive schemes are necessarily created in secret, and may be difficult for enforcement officials to uncover. Signs that competitors may be engaged in such a scheme may include a pattern of inexplicably identical contract terms or identical pricing changes with no discernible explanation.

For example, every grocery store in town begins charging $5 per gallon for milk. This can be logically explained by the fact that a shortage of cattle feed, which is made from now drought-stricken corn, has driven milk prices up. On the other hand, if the only three used car lots in town begin charging higher prices for their cars, making it impossible for consumers to find a “good deal,” it may be suspect. In addition, all three have altered their sales agreements and warranties to have substantially the same offerings, further making both consumers and investigators suspicious. The buying and selling of used vehicles is a highly subjective business, and the odds that something could occur to cause all three dealerships to begin charging the same prices, and asking the same terms, are slim.

The rise in milk prices at every store in town is in response to a natural occurrence, and not a scheme to fix prices. The changes at the used car dealerships, however, illustrates that prices are not the only things that can be “fixed” in an anti-competition scheme. Other terms that may be manipulated to affect prices to consumers may include:

  • Warranties
  • Shipping fees
  • Discount programs or promotions
  • Financing rates
  • Pricing policies
  • Terms or conditions of sale, including credit terms
  • Costs and capacity

Other clues to anti-competition schemes include invitations made between businesses to coordinate prices, or a very public offer by one competitor to “end a price war” if it’s rival is willing to do the same, with terms that are very specific to setting future prices jointly.

Related Legal Terms and Issues

  • Monopolize – To have, acquire, or exercise a monopoly; to take over and control something complete, such as the trade of a commodity or service.
  • Collusion – The secret or illegal conspiracy or cooperation, especially for fraudulent or deceptive purposes.

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