Price fixing is an agreement between participants on the same side in a market to buy or sell a product, 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.
The intent of price fixing may be to push the price of a product as high as possible, generally leading to profits 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. For example, manufacturers and retailers may conspire to sell at a common "retail" price; set a common minimum sales price, where sellers agree not to discount the sales price below the agreed-to minimum price; buy the product from a supplier at a specified maximum price; adhere to a price book or list price; engage in cooperative price advertising; standardize financial credit terms offered to purchasers; use uniform trade-in allowances; limit discounts; 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; impose mandatory surcharges; purposefully reduce output or sales in order to charge higher prices; or purposefully share or pool markets, territories, or customers.
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.
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, citric acid, graphite electrodes, and bulk vitamins.
Legal status in the United States and Canada
Criminal prosecutions may only be handled by the U.S. Department of Justice, but the Federal Trade Commission also has jurisdiction for civil antitrust violations. Many state attorneys general also bring antitrust cases and have antitrust offices, such as Virginia, New York, and California.
Private individuals or organizations may file lawsuits for triple damages for antitrust violations, and depending on the law, recover attorneys fees and costs expended on prosecution of a case.
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, US Courts have divided price fixing into two categories: vertical and horizontal maximum price fixing. Vertical price fixing includes a manufacturer's attempt to control the price of its product at retail. 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 offense under section 45 of the Competition Act. Bid rigging 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.
Price fixing is illegal in Australia under the Competition and Consumer 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. Section 48 of the Competition and Consumer Act 2010 (Cth) explicitly states, "A corporation shall not engage in the practise of resale price maintenance." A broader understanding of this statutory provision is in Section 96(3)of the Competition and Consumer Act 2010 (Cth), which broadly defines what can be resale price maintenance.
New Zealand law prohibits price fixing, among most other anti-competitive behaviours under the Commerce Act 1986. The act covers practices similar to that of US and Canadian law, and is enforced by the New Zealand Commerce Commission.
British competition law prohibits almost any attempt to fix prices.
The Net Book Agreement 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 began discounting books, followed by rival Waterstones.
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.
In countries other than the United States, Canada, Australia, New Zealand, Japan, Korea and within the European Union, price-fixing is not usually illegal and is often practiced. When the agreement to control price is sanctioned by a multilateral treaty or is entered by sovereign nations as opposed to individual firms, the cartel may be protected from lawsuits and criminal antitrust prosecution. This explains, for example, why OPEC, the global petroleum 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.
Dynamic random access memory (DRAM)
In October 2005, the Korean company Samsung pleaded guilty to conspiring with other companies, including Infineon and Hynix Semiconductor, to fix the price of dynamic random access memory (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 2006, the government of France fined 13 perfume brands and three vendors for price collusion between 1997 and 2000. The brands include L'Oréal (4.1mil euro), Pacific Creation Perfumes (90,000 euro), Chanel, LVMH's Sephora (9.4mil euro) and Hutchison Whampoa's Marionnaud (12.8mil euro).
Liquid crystal display
In 2008 in the US, LG Display Co., Chunghwa Picture Tubes and Sharp Corp., 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 would pay $400 million, the second-highest criminal fine that the US Justice Department antitrust division has ever imposed. Chunghwa would pay $65 million for conspiring with LG Display and other unnamed companies and Sharp would pay $120 million, according to the department.
In 2010, the EU fined LG Display €215 million for its part in the LCD price fixing scheme. Other companies were fined for a combined total of €648.9 million, including Chimei Innolux, AU Optronics, Chunghwa Picture Tubes Ltd., and HannStar Display Corp.. LG Display said it is considering appealing the fine.
Air cargo market
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.
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". In 2013 Air New Zealand was the final airline of the 13 to settle.
The Commission noted that it might involve up to 60 airlines. In 2009 the Commission said overseas competition authorities were also investigating the air cargo market, including the US and Australia where fines had been imposed.
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.
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