Price Fixing

The Price-Fixing Debate

There has been an academic debate about whether price-fixing agreements should be outlawed. Some economists in the libertarian tradition argue that price-fixing cartels are inherently unstable and unlikely to be effective in maintaining artificially high prices. Successful price collusion would be of negligible proportions, even without antitrust legislation. They also employ a “natural rights” theory of property and defend a right to fix prices as part of a person's natural right to freely use her property. They argue that any interference in the freedom to contract is a violation of natural rights. The benefit most often claimed for price fixing is a method for firms to reduce uncertainty and thereby to reduce the cost of investment and marketing mistakes.

Most economists and law professors, however, remain almost unanimous in condemning all price fixing as a harmful practice. They provide empirical evidence which suggests that price-fixing agreements can, in fact, be quite long-lived. They note that it is always possible that the members of an industry might succeed in getting together and fixing a price. By raising prices and restricting supply, price fixing makes commodities and services unavailable to some consumers and unnecessarily expensive for others.

A price-fixing agreement, therefore, distorts the functioning of the marketplace by causing resources to be switched from production of the affected product to other less highly valued uses. Elimination of pricing uncertainty, as claimed by[Page 632] the libertarian economists, can easily be achieved by the use of legally permissible information sharing among members of an industry. In this view, an effective way to deter price fixing is strong legislative and enforcement systems with severe penalties for price fixing.

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