Price Fixing

Published Oct 25, 2023

Definition of Price Fixing

Price fixing refers to an agreement between competitors to set the price of a particular product or service, usually to maintain higher prices and reduce competition. This collusive practice is illegal in most countries because it is considered anti-competitive and harms consumers by limiting choices and artificially inflating prices. Price fixing can occur in various industries, such as electronics, pharmaceuticals, and oil.

Example

Let’s consider a hypothetical scenario involving two competing gas stations in a small town. Both gas stations decide to collude and fix the price of gasoline at $5 per gallon, despite their costs being lower. By doing so, they eliminate price competition and ensure that customers have no other option but to purchase gasoline at the inflated price.

This price-fixing agreement allows both gas stations to earn higher profits at the expense of consumers who are forced to pay more for a necessary commodity. Additionally, it prevents new competitors from entering the market and offering lower prices, further limiting consumer choice and driving prices even higher.

Why Price Fixing Matters

Price fixing is illegal and widely condemned because it harms consumers and undermines the principles of fair competition. When prices are artificially inflated through collusion, consumers are forced to pay more for goods and services, reducing their purchasing power and negatively impacting their overall well-being.

Price fixing also restricts market entry and competition, limiting innovation, choice, and efficiency. In economically competitive markets, businesses should be driven to provide better products and services at competitive prices. Price-fixing agreements distort this natural process, stifling innovation and restricting economic growth.

By actively enforcing laws against price fixing, governments and regulatory bodies protect consumers and ensure fair competition, promoting a healthy economy and encouraging businesses to offer high-quality products at competitive prices.