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Price-Fixing

Price-fixing is any agreement between competitors (“horizontal”) or between manufacturers, wholesalers, and retailers (“vertical”) to raise, fix, or otherwise maintain prices. Many, though not all, price-fixing agreements are illegal under antitrust or competition law. Illegal actions may be prosecuted by government criminal or civil enforcement officials or by private parties who have suffered economic damages as a result of the conduct.

Horizontal Price-Fixing

Examples of horizontal price-fixing agreements include agreements to adhere to a price schedule or range; to set minimum or maximum prices; to advertise prices cooperatively or to restrict price advertising; to standardize terms of sale such as credits, markups, trade-ins, rebates, or discounts; or to standardize the package of goods and services included in a given price. All such agreements are per se illegal under United States antitrust law; that is, the court will assume that any such agreement is anticompetitive and will not hear arguments to the effect that the agreement actually enhances quality, competition, or consumer welfare in a particular case. Horizontal price-fixing agreements are also illegal under European Union (EU) competition law, where they are similarly subject to socalled hard-core restrictions.

There is nothing illegal about competitors actually setting the same prices as one another or even about them doing so consciously. (Indeed, in a perfectly competitive market, we would expect retailers to sell their goods at the same prices.) The offense lies in their entering into an agreement with one another to set or raise or maintain prices. (Section 1 of the U.S. Sherman Act, for example, prohibits any “contract, combination or conspiracy” that restrains trade.) The agreement, to be a violation, need not set a particular price; the law frowns on any agreement that interferes with competitors' ability to set their own prices with complete freedom. Thus, agreements that set price ranges, establish formulae for rates of change in prices, or supply guidelines for competitors' responses to changes in their cost structures are all violations, even though they neither establish a precise common price nor eliminate all possible price competition. Not every competitor in the market need participate in the agreement. Even an agreement between two tiny competitors in an enormous, busy, and otherwise competitive market will be a violation.

Analysis of Horizontal Price-Fixing

Economists generally agree that horizontal pricefixing agreements are bad for consumers. Competition normally drives prices down, as competitors seek to lure away one another's customers. In a competitive market, therefore, the consumer realizes the greatest possible amount of consumer surplus—the value to the consumer of the good in excess of what the consumer actually has to pay for it. Price-fixing agreements, since they reduce competitors' ability to respond freely and swiftly to one another's prices, diminish consumer surplus by interfering with the competitive marketplace's ability to keep prices low. More important, horizontal agreements among competitors may facilitate their joint acquisition of market power—the ability to sustain higher prices than free competition would allow, without losing customers. A wide enough agreement could permit competitors to act as de facto monopolists, raising prices and cutting back on production to the detriment of consumer welfare. Moreover, they could do this without gaining any of the efficiency benefits of an actual merger or consolidation.

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