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In a competitive marketplace, organizations compete to offer quality goods and services to consumers at the lowest possible price. When multiple organizations collude to circumvent competition and inflate their profits by selling goods at an inflated price, we observe a form of corruption known as price fixing.
What is Price Fixing?
Price fixing occurs when the participants in a market conspire to set the price of a product or service, rather than competing in good faith and allowing the price of goods to be determined by other market forces.
Corrupt organizations may engage in two different kinds of price fixing: horizontal and vertical.
Horizontal price fixing happens when companies who are competitors in the marketplace collude to fix the price of a good or service. Goods and services may be fixed at a premium price, elevating profits for the conspirators on a per-sale basis, or they may be fixed at a discount price to capture more market share and drive out competitors with higher operating costs.
Vertical price fixing takes place between manufacturers, wholesalers, and retailers that participate in the same supply chain. In a vertical price fixing scheme, a manufacturer enters into an agreement with retailers where it establishes and enforces a minimum resale price for its product. This practice, sometimes known as retail price maintenance, is designed to preserve the perceived value of a brand in the marketplace by preventing retailers from selling the associated product at a discount.
Why is Price Fixing Bad?
When corporations collude to fix the prices of goods and services, inefficiencies are created in the marketplace. As a result, downstream purchasers and the end user will spend more on goods and services, receiving less value for their money.
What is an Example of Price Fixing?
The Organization of Petroleum Exporting Countries (OPEC) has engaged extensively in horizontal price fixing in the international oil markets.
In the past, OPEC has:
- Restricted daily oil production within the cartel by imposing quotas to maintain high demand levels, high prices, and large profit margins.
- Conspired to artificially lower the price of oil, damaging the business operations and profitability of their competitors with less efficient processes and higher extraction costs.
Is Price Fixing Illegal?
In the United States, federal prohibition against price fixing is created by the Sherman Antitrust Act of 1890. The Sherman Act makes it illegal to:
- Establish any contract that restrains interstate or international trade (such as contracts that inhibit competition in the marketplace)
- Conspire with others to monopolize any part of interstate or international trade (such as participating in a price fixing cartel)
Violations of the Sherman Act can result in criminal penalties of up to $1 million for individuals and $100 million for corporations, along with up to 10 years in prison for implicated officials.
In 2007, the United States Supreme Court ruled that price maintenance was no longer a per se violation of the Sherman Act. The court overturned a 90-year-old precedent when it ruled that protecting interbrand competition was the primary purpose of antitrust law, and that there were numerous documented cases where minimum resale price maintenance supported interbrand competition. Antitrust cases involving price maintenance are now analyzed under the rule of reason and may be considered lawful if they benefit interbrand competition.