The Tendencies towards Price Fixing/Leadership, Collusions and Cartel Behavior


Patterns


 


Price fixing refers to an agreement, either expressed or implied, between market


participants on the same side to buy or sell a product or service only at a fixed price, or


maintain a price at a given level by controlling supply and demand.[1] Such a group of


competing firms involved in price fixing is also referred to as a cartel. Collusion also


refers to an agreement among firms to limit open competition by deceiving others of


their legal rights, or to obtain an illegal objective typically by gaining an unfair


advantage.[2]


 


Price fixing involves a conspiracy between sellers or buyers and is intended to push a


product’s price as high as possible to make profits for all sellers or to stabilize prices.


Such actions as agreeing to sell at a common target or minimum price, buying a


supplier’s product at an agreed upon maximum price and adhering to a price book or list


price all constitute price fixing. Horizontal price fixing is price collusion amongst


competitors, while vertical price fixing is collusion between a producer and its retailers.


When price fixing is allowed in some markets, it is known as resale price maintenance.


It is claimed that price fixing is basically unstable because a firm in a cartel can


sometimes cheat and secretly lower its price and expand in the market, but that


regulating price fixing through legislation limits innovation because it hampers the


creation of competing firms.[3]


 


Cartels are formal organizations of producers that usually occur in industries dominated


by a small number of sellers, or in an oligopoly, and commonly involving homogeneous


products like petroleum and copper. Its members may agree on such issues as price


fixing, total industry output and market shares in order to increase each member’s


profits by reducing competition. Government enforces the agreement in a public cartel


and shields the latter from legal actions, while antitrust laws regulate the activities of


private cartels, which are often forbidden. Identifying and breaking up private cartels is


rarely easy because collusion agreements are not put in writing by the firms involved.


According to economic studies, cartels have achieved a median price increase of


around 25% in the last 200 years. While private international cartels have posted a 28%


average price increase for the same time span, domestic cartels averaged 18%. Those


in the sample which failed to raise market prices represent fewer than 10% of all cartels.


Factors that will affect the monitoring of firms in a cartel include the number of firm


members, the characteristics of products sold and each member’s production costs.[4]


 


Cartels represent explicit collusion, while collusion that is not overt is known as tacit


collusion. According to theory, when suppliers are independent of each other, prices


are forced to their minimum, efficiency is increased and the price determination by each


firm is lessened. However, when suppliers collude to raise prices, sales loss is reduced


because consumers lack alternative choices at lower prices. The benefits of colluding


firms are achieved at the expense of efficiency to society. Practices such as uniform


prices, a penalty for price discounts and advance notice of price changes all suggest


collusion.[5]


 


Collusion is mostly illegal in North America and in Europe and examples of it in the U.S.


include the market division and price fixing among heavy electrical equipment


manufacturers, including General Electric, in the 1960s, the attempted restriction of


players’ salaries by Major League Baseball owners in the mid-1980s, and the price


fixing of cafeteria food providers in schools and the military in 1993. [6]


 


Examples of international cartels at work include the price fixing of washing powder in 8


European countries by Unilever and  Procter and Gamble, for which both were recently


penalized by a 315-million euro fine, the cartel created by Asian Racing Federation


members, and the Organization of the Petroleum Exporting Countries (OPEC)


composed of sovereign states, where some members however, often break  rank to


increase production quotas.[7]



 


[1] “Price fixing”, Wikipedia, 1 June 2011, <http://en.wikipedia.org/wiki/Price_fixing>


  [accessed 7 June 2011]


[2] “Collusion”, Wikipedia, 11 May 2011, <http://en.wikipedia.org/wiki/Collusion>  [accessed 7 June 2011]


[3] “Price fixing”


[4] “Cartel”, Wikipedia, 28 May 2011, <http://en.wikipedia.org/wiki/Cartel>  [accessed 7 June 2011]


[5] “Collusion”


[6] ibid


[7] “Cartel”



Credit:ivythesis.typepad.com


0 comments:

Post a Comment

 
Top