Definition: Agreement between companies to sell products or services for certain prices to control their markets or otherwise to restrict price competition
Significance: Price fixing eliminates competition and forces buyers to pay higher prices than the market would normally bear. The practice undermines the concepts that support the free enterprise economy of the United States.
The practice of price fixing is illegal in the United States, Canada, Australia, and the European Union. In other countries of the world, by contrast, it is a common practice and is often supported by the government. Price fixing is, in a general sense, artificial manipulation of the market price of a good or service to increase seller profits. The most common form of price fixing is an agreement by a group of competitors as to the price they will charge for a product or a service—that is, to fix the price. The agreement does not bind every seller in the particular market; however, agreement among major competitors significantly affects the price the majority of consumers will pay. Other forms of price fixing include agreements to eliminate discounts, maintain prices at a given point, fix credit terms, use a standard formula for figuring prices, and create price discounts. Price fixing can also be perpetrated by buyers who all agree to pay a set or fixed price for a good or service.
Several market developments may be indications of price fixing. When a large number of providers of a good or service charge the exact same price, there is a likelihood of price fixing. If sellers of the same good or service who have a history of charging different prices all begin charging the same price, they may be involved in price fixing. If a higher price is charged to local costumers than to consumers in other areas, there may be local price fixing. The elimination of discounts in a market that always used discounts and an increase in price when there is no apparent increase in cost may also be the result of price fixing by sellers.
In 1890, the Sherman Antitrust Act was passed by Congress in an effort to check the growth of monopolies. The act stated that any business grouping that attempted to restrict trade or commerce was illegal. The language of the legislation, however, proved to be too vague to curb monopolies. Then, in 1914, the Clayton Antitrust Act was passed to strengthen the Sherman Antitrust Act. It contained more precise language and declared that it was illegal for companies to enter into agreements to fix or control prices such that competition was reduced or eliminated. Price fixing was made a felony.
The Antitrust Division of the United States Department of Justice prosecutes both criminal and civil cases of price fixing. The U.S. Federal Trade Commission also prosecutes civil cases. In addition, many states’ attorneys general also prosecute cases at the state level. Individual citizens and organizations also have the right to bring suit against business entities for price fixing. Cases of international price fixing by private companies or cartels that either are based or sell in the United States are also prosecuted under the United States antitrust laws.
In 1991, the Coalition Against Price Fixing attempted to get Congress to pass the Consumer Protection Against Price Fixing Act. The bill passed the Senate but failed to become law. The bill resulted from the efforts of a group of retailers from various market sectors to prohibit a manufacturer from setting a minimum price at which its product could be sold and refusing to supply retailers who sold at lower prices.
From a legal standpoint, price fixing is a complex issue. For price fixing to occur, there must be intent to restrict competition on the part of the business entities involved. The price fixing must be the result of agreement or communication among the firms, individuals, sellers, or buyers involved in the scheme. Firms may charge the same price for an item as does a major seller or market leader so long as no agreement is made. This often happens in the breakfast cereal and cigarette markets.
Price fixing conspiracies have occurred on regional, national, and international scales in a wide variety of business activities, including construction, agriculture, retail trade, and manufacturing, as well as in various service industries. In 1961, the multinational General Electric, Westinghouse, and several other manufacturers of heavy electrical equipment were convicted of price fixing about sales of such equipment. This was the largest price fixing case that had been prosecuted under the Sherman Antitrust Act up to that time. It was also the first time that individuals involved in price fixing were sentenced to prison.
In 1993, Archer Daniels Midland Company, an agricultural products conglomerate, was investigated and prosecuted for its role in price fixing of lysine by an international cartel. In 1997, the company was fined $100 million, which was the largest antitrust fine up to that time. Three of the company’s senior officials received prison sentences in 1999. In 2005, Samsung was fined $300 million for its involvement in a an international cartel conspiracy that fixed the price of dynamic random access memory.
- Connor, John W. Global Price Fixing. Berlin-Heidelberg: Springer-Verlag, 2008. This study looks at the participation of American firms in global price fixing schemes and elucidates the advantages to firms and the costs to consumers. Also discusses the use of antitrust law by the United States and Europe to control and eliminate price fixing.
- Greenhut, Melvin L., and Bruce Benson. American Antitrust Laws in Theory and in Practice. Brookfield, Vt.: Avebury, 1989. A scholarly analysis of antitrust laws and price fixing in the United States.
- Rockefeller, Edwin S. Antitrust Religion. Washington, D.C.: Cato Institute, 2007. An examination of trusts, monopolies, mergers, “tying,” and price fixing.
- Schlegelmilch, Bodo. Marketing Ethics: An International Perspective. London: Thomson Learning, 1998. As part of an investigation of global business ethics, this study examines the ethical issues involved with price fixing. Points out that price fixing is not illegal worldwide and asks what the responsibilities of businesses are in the international marketplace.
- Sullivan, Thomas E., ed. The Political Economy of the Sherman Act: The First One Hundred Years. New York: Oxford University Press, 1991. This compilation of essays provides an excellent overview of antitrust laws and the debate about them. It traces the history and evolution of antitrust laws from 1890 to 1990. It discusses the role of government in market regulation and presents a good analysis of how antitrust laws, which prohibit price fixing, affect American business both domestically and internationally.
See also: antitrust legislation.