Price Fixing

Definition

The term price fixing is used to describe an agreement between buyers or sellers that dictates the price of a product or service, rather than allowing the forces of supply and demand to establish the price.

Price fixing is illegal in many countries, and may also be considered a criminal offense in the United States under antitrust laws.

Explanation

Price fixing is oftentimes used by buyers or sellers to inflate the price of a product or service so that extraordinary profits are gained; however, such agreements can also be used to lower or help stabilize prices.  Governments of countries will sometimes engage in price fixing of exports through subsidies.

Price fixing can also be practiced by both buyers and sellers.  For example, retailers (buyers) may agree to purchase a product at an artificially low price from a manufacturer, while sellers can group together to inflate the price of a product.  Generally, price fixing can be subdivided into two categories:

  • Vertical Price Fixing:  includes instances where manufacturers attempt to control the price of a product at retail.
  • Horizontal Price Fixing:  includes agreements between retail competitors to establish and charge consumers a specific price for a product.

Note:  In some markets, horizontal price fixing is allowed and is referred to as retail price maintenance.  For example, a manufacturer of luggage may not allow approved retailers to discount their items.

In addition to price fixing, anti-competitive practices may include bid rigging, boycotts, disparagement, dividing territories, dumping, exclusive dealing, tying, as well as the unethical collection of business intelligence.

Anti-competitive laws in the United States were passed to promote fair competition for the benefit of consumers.  This includes a collection of both federal and state laws that are an extension of antitrust laws such as the Sherman Antitrust Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914.

Related Terms

anti-competitive practice, confidentiality agreement, conflict of interest, dividing markets, bid rigging, group boycott, disparagement, dumping, exclusive dealing, tying arrangements, Sherman Antitrust Act of 1890, Clayton Antitrust Act of 1914, limit pricing, Federal Trade Commission Act of 1914, resale price maintenance