Price fixing
Overview
 
Price fixing is an agreement between participants on the same side in a market to buy or sell a product
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...

, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...

. The group of market makers involved in price fixing is sometimes referred to as a cartel
Cartel
A cartel is a formal agreement among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production. Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products...

.

The intent of price fixing may be to push the price of a product as high as possible, leading to profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...

 for all sellers but may also have the goal to fix, peg, discount, or stabilize prices.
Encyclopedia
Price fixing is an agreement between participants on the same side in a market to buy or sell a product
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...

, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...

. The group of market makers involved in price fixing is sometimes referred to as a cartel
Cartel
A cartel is a formal agreement among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production. Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products...

.

The intent of price fixing may be to push the price of a product as high as possible, leading to profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...

 for all sellers but may also have the goal to fix, peg, discount, or stabilize prices. The defining characteristic of price fixing is any agreement regarding price, whether expressed or implied.

Price fixing requires a conspiracy between sellers or buyers. The purpose is to coordinate pricing for mutual benefit of the traders.

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
Price book
In economics, a price book is a book in which the normal prices of an item are listed for all suppliers. This allows one to determine the lowest price possible....

 or list price; engage in cooperative price advertising
Advertising
Advertising is a form of communication used to persuade an audience to take some action with respect to products, ideas, or services. Most commonly, the desired result is to drive consumer behavior with respect to a commercial offering, although political and ideological advertising is also common...

; standardize financial credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...

 terms offered to purchasers; use uniform trade-in allowances
Discounts and allowances
Discounts and allowances are reductions to a basic price of goods or services.They can occur anywhere in the distribution channel, modifying either the manufacturer's list price , the retail price , or the list price Discounts and allowances are reductions to a basic price of goods or services.They...

; limit discount
Discounts and allowances
Discounts and allowances are reductions to a basic price of goods or services.They can occur anywhere in the distribution channel, modifying either the manufacturer's list price , the retail price , or the list price Discounts and allowances are reductions to a basic price of goods or services.They...

s; 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
Markup (business)
Markup is the difference between the cost of a good or service and its selling price. A markup is added on to the total cost incurred by the producer of a good or service in order to create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and...

; impose mandatory surcharge
Surcharge
A surcharge may mean:*an extra fee added onto another fee or charge** Fuel surcharge, sky freight charges which represents additions due to jet fuel prices.** Bunker adjustment factor, sea freight charges which represents additions due to oil prices....

s; purposefully reduce output or sales in order to charge higher prices; or purposefully share or pool markets, territories, or customers.

Price fixing is permitted in some markets but not others
Competition law
Competition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....

; where allowed, it is often known as resale price maintenance
Resale price maintenance
Resale price maintenance is the practice whereby a manufacturer and its distributors agree that the latter will sell the former's product at certain prices , at or above a price floor or at or below a price ceiling...

or retail price maintenance.

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
Deadweight loss
In economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal...

.

Criticism on legislation

Economic libertarians claim that price fixing is inherently unstable and that regulation does more harm than good. A company can sometimes cheat on the cartel by secretly lowering its price and expand in the market. If there are low barriers to entry, new firms may enter the market. Also, libertarians say that price-fixing legislation limits innovation because it discourages the creation of competing companies.

Legal status in the United States and Canada

In the United States, price fixing can be prosecuted as a criminal federal offense under section 1 of the Sherman Antitrust Act
Sherman Antitrust Act
The Sherman Antitrust Act requires the United States federal government to investigate and pursue trusts, companies, and organizations suspected of violating the Act. It was the first Federal statute to limit cartels and monopolies, and today still forms the basis for most antitrust litigation by...

. Criminal prosecutions may only be handled by the U.S. Department of Justice, but the Federal Trade Commission
Federal Trade Commission
The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...

 also has jurisdiction for civil antitrust violations. Many State Attorneys General also bring antitrust
Antitrust
The United States antitrust law is a body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are intended to encourage competition in the marketplace. These competition laws make illegal certain practices deemed to hurt businesses or consumers or both,...

 cases and have antitrust offices, such as Virginia
Virginia
The Commonwealth of Virginia , is a U.S. state on the Atlantic Coast of the Southern United States. Virginia is nicknamed the "Old Dominion" and sometimes the "Mother of Presidents" after the eight U.S. presidents born there...

, New York
New York
New York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...

, and California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...

. 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 2007, the United States 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.

Since 1997, the US Court divided price fixing into two categories: vertical and horizontal maximum price fixing. In State Oil Co. v Khan, the US Supreme Court held that vertical price fixing is no longer considered a per se violation of the Sherman Act, but horizontal price fixing is still considered a breach of the Sherman Act. Also in 2008, the defendants of United States v LG Display Co., United States v. Chunghwa Picture Tubes, and United States v. Sharp Corporation heard in the Northern District of California, agreed to pay a total sum of $ 585 million to settle their prosecutions for conspiring to fix prices of liquid crystal display panels, which was the second largest amount awarded under the Sherman Act in history.

In Canada, it is an indictable criminal offence under section 45 of the Competition Act
Competition Act
The Competition Act is a Canadian federal law governing most business conduct.The Act contains both criminal and civil provisions aimed at preventing anti-competitive practices in the marketplace....

. Bid rigging
Bid rigging
Bid rigging is a form of fraud in which a commercial contract is promised to one party even though for the sake of appearance several other parties also present a bid. This form of collusion is illegal in most countries...

 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 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.

Australia

Price fixing is illegal in Australia under the Consumer and Competition Act 2010 which have considerably similar prohibitions to the US and Canadian prohibitions. The Act is administered and enforced by the Australian Competition and Consumer Commission
Australian Competition and Consumer Commission
The Australian Competition and Consumer Commission is an independent authority of the Australia government. It was established in 1995 with the amalgamation of the Australian Trade Practices Commission and the Prices Surveillance Authority to administer the Trade Practices Act 1974...

. Section 48 of the Comsumer and Competition Act 2010 (Cth) explictly states that; "A corporation shall not engage in the practise of resale price maintainence." For a broader understanding of this statutary provision, we refer to Section 96(3)of the Consumer and Competition Act 2010 (Cth) that broadly defines what can and what potentially constitue resale price maintainence.

New Zealand

New Zealand law prohibits price fixing, among most other anti-competitive behaviours under the Commerce Act 1986
Commerce Act 1986
The Commerce Act 1986 is a statute of New Zealand. It prohibits conduct that restricts competition and purchase of shares or assets where that would lessen competition in a market....

. The act covers practises similar to that of US and Canadian law, and is enforced by the New Zealand Commerce Commission
Commerce Commission
The Commerce Commission is a New Zealand government agency charged with enforcing legislation that promotes competition in the country's markets and prohibits misleading and deceptive conduct by traders...

.

United Kingdom

British competition law prohibits almost any attempt to fix prices.

The Net Book Agreement
Net Book Agreement
The Net Book Agreement was a British fixed Book Price Agreement between publishers and booksellers which set the prices at which books were to be sold to the public....

 was a public agreement between UK booksellers from 1900 to 1991 to sell new books only at the recommended retail price to protect the revenues of smaller bookshops. The agreement collapsed in 1991 when the large book chain Dillons
Dillons
Dillons is a grocery supermarket chain based in Hutchinson, Kansas, and is a division of The Kroger Company. Other banners under Dillon Stores Division include Gerbes in Missouri, Baker's in Omaha, Nebraska and a Food 4 Less store in Fremont, Nebraska...

 began discounting books, followed by rival Waterstones.http://books.google.com/books?id=-2LbVfzDfjwC&pg=PA275&lpg=PA275&dq=%22net+price+agreement%22+books&source=web&ots=wbq-9ED8bv&sig=yUAPMvVCikhSAb37wxLuHG5CIkE#PPA275,M1 http://query.nytimes.com/gst/fullpage.html?res=9D0CEEDD1E3FF934A35753C1A967958260&sec=&spon=&pagewanted=all

However, price-fixing is still legal in the magazine and newspaper distribution industry. Retailers who sell at below cover price are subject to withdrawal of supply. The Office of Fair Trading has given its approval to the status quo.

Other countries

In countries other than the United States, Canada, Australia, New Zealand and within the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...

, price-fixing is not usually illegal and is often practiced. When the agreement to control price is sanctioned by a multilateral treaty
Treaty
A treaty is an express agreement under international law entered into by actors in international law, namely sovereign states and international organizations. A treaty may also be known as an agreement, protocol, covenant, convention or exchange of letters, among other terms...

 or is entered by sovereign nations as opposed to individual firms, the cartel
Cartel
A cartel is a formal agreement among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production. Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products...

 may be protected from lawsuits and criminal antitrust
Antitrust
The United States antitrust law is a body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are intended to encourage competition in the marketplace. These competition laws make illegal certain practices deemed to hurt businesses or consumers or both,...

 prosecution. This explains, for example, why OPEC
OPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...

, the global petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...

 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 that co-operate with the anti-trust authority see their prospective penalties either wiped out or reduced.

In October 2005, the Korea
Korea
Korea ) is an East Asian geographic region that is currently divided into two separate sovereign states — North Korea and South Korea. Located on the Korean Peninsula, Korea is bordered by the People's Republic of China to the northwest, Russia to the northeast, and is separated from Japan to the...

n company Samsung
Samsung
The Samsung Group is a South Korean multinational conglomerate corporation headquartered in Samsung Town, Seoul, South Korea...

 pleaded guilty to conspiring with other companies, including Infineon and Hynix Semiconductor, to fix the price of dynamic random access memory
Dynamic random access memory
Dynamic random-access memory is a type of random-access memory that stores each bit of data in a separate capacitor within an integrated circuit. The capacitor can be either charged or discharged; these two states are taken to represent the two values of a bit, conventionally called 0 and 1...

 (DRAM) chips. Samsung was the third company to be charged in connection with the international cartel and was fined $300 million, 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 U.S. Department of Justice with their ongoing investigation of the conspiracy.

In late 2005/early 2006, Lufthansa and Virgin Atlantic came forward about their involvement in large price-fixing schemes for cargo and passenger surcharges in which 21 airlines were involved since 2000 (amongst which were British Airways, Korean Air, and Air France-KLM). U.S. Department of Justice fined the airlines a total of $1.7 billion, charged 19 executives with wrongdoing and four received prison terms. No major US airlines were involved.

In 2006, the government of France
Government of France
The government of the French Republic is a semi-presidential system determined by the French Constitution of the fifth Republic. The nation declares itself to be an "indivisible, secular, democratic, and social Republic"...

 fined 13 perfume
Perfume
Perfume is a mixture of fragrant essential oils and/or aroma compounds, fixatives, and solvents used to give the human body, animals, objects, and living spaces "a pleasant scent"...

 brands and three vendors for price collusion between 1997 and 2000. The brands include L'Oréal
L'Oréal
The L'Oréal Group is the world's largest cosmetics and beauty company. With its registered office in Paris and head office in the Paris suburb of Clichy, Hauts-de-Seine, France, it has developed activities in the field of cosmetics...

 (4.1mil euro), Pacific Creation Perfumes (90,000 euro), Chanel
Chanel
Chanel S.A. is a French fashion house founded by the couturier Gabrielle "Coco" Chanel, well established in haute couture, specializing in luxury goods . She gained the name "Coco" while maintaining a career as a singer at a café in France...

, LVMH
LVMH
LVMH Moët Hennessy • Louis Vuitton S.A., better known as LVMH, is a French multinational luxury goods conglomerate headquartered in Paris, Île-de-France, France. The company was formed after the 1987 merger of fashion house Louis Vuitton with Moët Hennessy, a company formed after the 1971 merger...

's Sephora
Sephora
Sephora is a chain of cosmetics stores founded in France in 1970 and acquired by Paris-based conglomerate LVMH in 1997. The Sephora chain includes more than 750 stores in 17 countries...

 (9.4mil euro) and Hutchison Whampoa
Hutchison Whampoa
Hutchison Whampoa Limited or HWL of Hong Kong is a Fortune 500 company and one of the largest companies listed on the Hong Kong Stock Exchange. HWL is an international corporation with a diverse array of holdings which includes the world's biggest port and telecommunication operations in 14...

'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
Lysine
Lysine is an α-amino acid with the chemical formula HO2CCH4NH2. It is an essential amino acid, which means that the human body cannot synthesize it. Its codons are AAA and AAG....

, citric acid
Citric acid
Citric acid is a weak organic acid. It is a natural preservative/conservative and is also used to add an acidic, or sour, taste to foods and soft drinks...

, 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.

South Korea–based LG Display will pay $400 million, the second-highest criminal fine that 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.

In December 2008, the New Zealand Commerce Commission filed legal proceedings against 13 airlines in the New Zealand High Court. According to the Commission, the carriers "colluded to raise the price of [freight] by imposing fuel charges for more than seven years". The Commission noted that it might involve up to 60 airlines.

See also

  • Antitrust
    Antitrust
    The United States antitrust law is a body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are intended to encourage competition in the marketplace. These competition laws make illegal certain practices deemed to hurt businesses or consumers or both,...

  • Bid rigging
    Bid rigging
    Bid rigging is a form of fraud in which a commercial contract is promised to one party even though for the sake of appearance several other parties also present a bid. This form of collusion is illegal in most countries...

  • Collusion
    Collusion
    Collusion is an agreement between two or more persons, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage...

  • DRAM Price Fixing
    DRAM price fixing
    In 2002, the United States Department of Justice, under the Sherman Antitrust Act, began a probe into the activities of dynamic random access memory manufacturers...

  • FBI
  • Gold fixing
    Gold Fixing
    The London gold fixing or gold fix is the procedure by which the price of gold is determined twice each business day on the London market by the five members of The London Gold Market Fixing Ltd, on the premises of N M Rothschild & Sons...

  • Herfindahl index
    Herfindahl index
    The Herfindahl index is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also...

  • London Gold Pool
    London Gold Pool
    The London Gold Pool was the pooling of gold reserves by a group of eight central banks in the United States and seven European countries that agreed on 1 November 1961 to cooperate in maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per...

  • Monopoly
    Monopoly
    A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...

  • Net Book Agreement
    Net Book Agreement
    The Net Book Agreement was a British fixed Book Price Agreement between publishers and booksellers which set the prices at which books were to be sold to the public....


  • Oligopoly
    Oligopoly
    An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...

  • Price control
  • Resale price maintenance
    Resale price maintenance
    Resale price maintenance is the practice whereby a manufacturer and its distributors agree that the latter will sell the former's product at certain prices , at or above a price floor or at or below a price ceiling...

  • Sherman Antitrust Act
    Sherman Antitrust Act
    The Sherman Antitrust Act requires the United States federal government to investigate and pursue trusts, companies, and organizations suspected of violating the Act. It was the first Federal statute to limit cartels and monopolies, and today still forms the basis for most antitrust litigation by...

  • Trade Practices Act 1974 (Australia)
    Trade Practices Act 1974
    The Competition and Consumer Act 2010 is an act of the Parliament of Australia. On 1 January 2011 the Trade Practices Act 1974 was renamed the Competition and Consumer Act 2010. The act provides for protection of consumers and prevents some restrictive trade practices of companies. It is the key...

  • US Department of Justice
  • Variable pricing
    Variable pricing
    Most firms use a fixed price policy. That is, they examine the situation, determine an appropriate price, and leave the price fixed at that amount until the situation changes, at which point they go through the process again...

  • Vendor lock-in
    Vendor lock-in
    In economics, vendor lock-in, also known as proprietary lock-in or customer lock-in, makes a customer dependent on a vendor for products and services, unable to use another vendor without substantial switching costs...



External links

The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
x
OK