Price-fixing

Definition

Price-fixing is an illegal agreement between competing businesses to set prices at a certain level, rather than allowing the market to determine them. This practice undermines free competition and can lead to higher prices for consumers. It is a form of collusion that typically violates antitrust laws, which are designed to promote fair competition and protect consumer interests.

5 Must Know Facts For Your Next Test

1. Price-fixing can occur in various industries, including pharmaceuticals, telecommunications, and agriculture, impacting a wide range of consumer goods.
2. The Sherman Antitrust Act of 1890 was one of the first pieces of legislation aimed specifically at combating price-fixing and other anti-competitive practices.
3. Violators of price-fixing laws can face severe penalties, including hefty fines and imprisonment for individuals involved in the conspiracy.
4. Price-fixing not only harms consumers through inflated prices but also stifles innovation and reduces choices available in the marketplace.
5. Government enforcement agencies, like the Federal Trade Commission (FTC) in the U.S., actively investigate suspected price-fixing cases and can initiate lawsuits against offenders.

Review Questions

• How does price-fixing violate principles of free competition?
  • Price-fixing violates principles of free competition by preventing market forces from determining prices. When businesses collude to set prices, they eliminate the competition that typically drives prices down, leading to higher costs for consumers. This manipulation of pricing disrupts the natural dynamics of supply and demand, reducing choice and innovation in the market.
• Discuss how the Sherman Antitrust Act addresses price-fixing and its significance in American business history.
  • The Sherman Antitrust Act was significant in American business history as it established a legal framework for challenging anti-competitive practices like price-fixing. By explicitly prohibiting collusive agreements between competitors, this act empowered government agencies to investigate and prosecute violations. It marked a critical step toward regulating monopolies and promoting fair competition, setting a precedent for future antitrust legislation.
• Evaluate the long-term impacts of price-fixing on both consumers and businesses within an economic system.
  • The long-term impacts of price-fixing on consumers include sustained higher prices, reduced choices, and stifled innovation in products and services. For businesses, while collusion may provide short-term profits, it ultimately undermines competitive practices that drive efficiency and improvement. In an economic system, widespread price-fixing can lead to distrust among consumers and can provoke regulatory responses that reshape market dynamics, thus affecting overall economic health.

Related terms

Antitrust laws: Laws enacted to prevent anti-competitive practices and promote fair competition in the marketplace.

Collusion: An agreement among competitors to cooperate for their mutual benefit, often at the expense of consumers.

Market manipulation: Actions taken by individuals or groups to artificially influence the price or supply of goods in a market.