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
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