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price fixing: Definition from Answers.com

Price fixing is the conspiracy by several manufacturers to set prices for goods or services above the normal market rate. The U.S. Justice Department (DOJ) and the Federal Trade Commission (FTC) are the regulatory bodies responsible for determining whether companies are involved in price-fixing tactics. Both bodies have the ability to impose heavy fines on those companies found to be conspiring to fix prices.

The health care industry has been scrutinized many times for price fixing, especially companies that manufacture vitamins. In 1995, the Justice Department fined three vitamin manufacturers a total of $750 million dollars for conspiring to fix vitamin prices. In addition, three vitamin distributors were also found guilty of price fixing that same year; their fines totaled $137 million for fixing the prices for a handful of popular vitamins, and they had to pay just over $1 billion to 1000 corporate buyers of bulk vitamins, an amount reflecting overcharges during the years of the conspiracy.

Roche Holdings AG, which holds forty percent of the global vitamins market, agreed to pay a fined of $500 million and as of 1999 was the object of class-action lawsuits and investigation by the European Commission. Because of the various price-fixing scandals, Roche and other vitamin manufacturers may have trouble raising prices in the future, or even stabilizing them. The price-fixing conspiracy lasted from 1990 through 1999 and affected vitamins A, B2, B5, C, E, and beta carotene. It also included vitamin premixes, which are added to breakfast cereals and other processed foods. The Justice Departments probe of price fixing was expected to continue as the government attempted to build cases against other vitamin manufacturers.

In 1996, the FTC and the DOJ issued a revised Statement of Antitrust Enforcement Policy in Health Care. Under this new enforcement policy, the FTC and the DOJ will not necessarily view joint agreements on price between previously competing providers as unlawful price fixing if the integrated delivery system is sufficiently integrated. The enforcement statement does not, however, provide solid guidance on what constitutes integration sufficient to permit joint negotiations. But, it does offer rules of thumb that will allow those involved in integrated delivery systems to better assess whether their joint pricing activities will raise antitrust concerns.

The securities industry was also closely scrutinized in the 1990s for price-fixing tactics. Investigations of the National Association of Securities Dealers and the NASDAQ market by the Department of Justice and the Securities and Exchange Commission (SEC) during the latter part of the 1990s suggested that market makers colluded to fix prices and widen bid-ask spreads in attempts to increase dealers' profits at investors' expense. At a minimum, market makers appeared to have adopted a quoting convention that could be viewed as anticompetitive behavior.

In understanding the experience of the U.S. securities market, it is important to consider what sorts of behavior are deemed anticompetitive. U.S. law on overt price fixing is clear: Such behavior is illegal. However, in many cases there is no explicit agreement to fix prices. Based on the Sherman Antitrust Act, U.S. courts developed the doctrine of conscious parallelism, which means, according to the Supreme Court, that no formal agreement is necessary to constitute an unlawful conspiracy.

Prior to 1996, market makers were allegedly engaged in many price-fixing scandals. In the late 1990s, the Justice Department found evidence that this practice was still occurring. For example, price quotes on Instinet, a private electronic market, differed from NASDAQ quotes for the same stocks. As of 2000, the SEC was investigating individual traders in connection with price fixing, and there was the possibility that additional civil suits could be filed.

In 1999, a California appeals court unanimously ruled that Arco and eight other oil companies were entitled to summary judgment in a price-fixing suit because there was no evidence of an agreement among them to fix prices or limit the supply of the cleaner-burning gasoline mandated by California. The appeals court agreed with the trial court's original conclusion that the evidence provided by the plaintiffs suggested not a complex tangled web, but nine defendants using all available information sources to determine capacity, supply, and pricing decisions. The court ruled that the companies involved made these pricing decisions because they wanted to maximize their own individual profits and were not concerned about the profits of their competitors.

As of 2000, the Department of Justice was investigating thirty price-fixing cases, many of them involving food additives, feed supplement, and vitamins. Since price fixing occurs when companies conspire to set an artificially high price for a product, the nature of the food additive industry makes it easy to create price-fixing cartels. Because of the small number of companies that are involved in the additive industry, it is easier for them to organize and maintain a price-fixing conspiracy. Price fixing of food additives is also easy because a small number of companies means that prices are negotiated via individual contracts, instead of in an open market.

The establishment in the 1990s of international trade associations, which are facilitated by the European Union, is another major cause of price fixing. These trade associations provide data about their industry to association members, including information on the exact size of the market and the growth rate of the industry. That information can lead to establishment of a cartel, because the companies can extrapolate pricing information.

Archer Daniels Midland was prosecuted in 1996 for illegally fixing the prices of lysine, which is used as a nutritional additive in livestock feed, and citric acid. During the time of the conspiracy, Archer Daniels Midland produced 54 percent of the nation's lysine used in the United States and 95 percent of the world's source. Annual sales of lysine were $330 million in the United States and $600 million worldwide.

The company pleaded guilty to fixing the price of lysine from 1992 to 1996, and the Justice Department fined it $70 million. The higher prices of animal feed resulted in lost income for hog and poultry farmers, as well as feed companies.

Bibliography

Ackert, Lucy, and Church, Bryan. (1998). "Competitiveness and Price Setting in Dealer Market." Economic Review (July): 83(3) 4.

Calderwood, James. (1995). "Antitrust Warning." Transportation and Distribution (December): 36(12) 72.

Scheffey, Thomas. (2000). "Westlaw, Lexis Hit with Price-Fixing Claim." The Connecticut Law Tribune, (March 6): 20(5) 1.

[Article by: PATRICIA A. SPIROU]

Competition law
Basic concepts
Anti-competitive practices
Laws and doctrines

United States

Europe

Australia
Enforcement authorities and organizations
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Price fixing is an agreement between business competitors to sell the same product or service at the same price. In general, it is an agreement intended to ultimately push the price of a product as high as possible, leading to profits for all the sellers. Price-fixing can also involve any agreement to fix, peg, discount or stabilize prices. The principal feature is any agreement on price, whether expressed or implied. For the buyer, meanwhile, the practice results in a phenomenon similar to price gouging.

Price fixing requires a conspiracy between two or more sellers; the purpose is to coordinate pricing for mutual benefit at the expense of buyers. Sellers might agree to sell at a common target price; set a common "minimum" price; buy the product from a supplier at a specified "maximum" price; adhere to a price book or list price; engage in cooperative price advertising; standardize financial credit terms offered to purchasers; use uniform trade-in allowances; limit discounts; discontinue a free service or fix the price of one component of an overall service; adhere uniformly to previously-announced prices and terms of sale; establish uniform costs and markups; impose mandatory surcharges; purposefully reduce output or sales in order to charge higher prices; or purposefully share or "pool" markets, territories, or customers.

Generally, price fixing is illegal, but it may nevertheless be tolerated or even sanctioned by some governments at various times, particularly among those whose countries are developing economies. See also Collusion.

In neo-classical economics, price fixing is inefficient. The anti-competitive agreement by producers to fix prices above the market price transfers some of the consumer surplus to those producers and also results in a deadweight loss.

United States and Canada

In the United States, price fixing can be prosecuted as a criminal felony offense under section 1 of the Sherman Antitrust Act.[1] In Canada, it is an indictable criminal offence under section 45 of the Competition Act. Bid rigging is considered a form of price fixing and is illegal in both the United States (s.1 Sherman Act) and Canada (s.47 Competition Act). In the United States, agreements to fix, raise, lower, stabilize, or otherwise set a price are illegal per se.[2] It does not matter if the price agreed upon is reasonable or for a good or altruistic cause; or if the agreement is explicit and formal or unspoken and tacit. In the United States, price-fixing also includes agreements to hold prices the same, discount prices (even if based on financial need or income), set credit terms, agree on a price schedule or scale, adopt a common formula to figure prices, banning price advertising, or agreeing to adhere to prices that one announces.[3] Although price fixing usually means sellers agreeing on price, it can also include agreements among buyers to fix the price at which they will buy products.

Under American law, exchanging prices among competitors can also violate the antitrust laws. This includes exchanging prices with either the intent to fix prices or if the exchange affects the prices individual competitors set. Proof that competitors have shared prices can be used as part of the evidence of an illegal price fixing agreement.[4] Experts generally advise that competitors avoid even the appearance of agreeing on price.[5]

Under U.S. law, price fixing is only illegal if it is intentional and comes about via communication or agreement between firms or individuals. It is not illegal for a firm to copy the price movements of a de facto market leader called price leadership, which has been seen to be the case in markets for breakfast cereals and cigarettes. But informal agreements or unspoken agreements to fix price also can violate the antitrust laws. The price-fixing laws apply to industries and professionals, for-profit concerns and non-profits and charities.[6] The United States Department of Justice Antitrust Division and United States Federal Trade Commission are responsible for enforcing federal price fixing laws; see also Sherman Antitrust Act. The Department of Justice handles both criminal and civil cases. As of 2004 under US law corporations may be fined up to $100 million for criminal price fixing; individuals can be charged and sentenced to prison sentences of up to 10 years for price-fixing violations. The Federal Trade Commission can prosecute firms for price fixing as a civil matter. Many State Attorneys General also bring antitrust cases and have antitrust offices, such as Virginia, New York, and California. Private individuals or organizations can bring their own lawsuits for triple damages for antitrust violations and also recover attorneys fees..[7]

Two books were published about the Archer Daniels Midland (ADM) price-fixing case, that occurred during the mid-1990s, by authors that conducted several years of extensive investigation.[8]

Criticism on legislation

Economic libertarians conclude that price fixing is inherently unstable and regulation does more harm than good. Companies can easily cheat on the cartel by secretly lowering its price and expanding in the market. New firms can enter the market. Also, it limits innovation because it discourages the creating of new, competing companies.[9]

Price fixing in Australia

Price fixing is illegal in Australia under the Trade Practices Act, the provisions of which are broadly similar to the US and Canadian prohibitions. The Act is administered and enforced by the Australian Competition and Consumer Commission.

Price fixing in United Kingdom

British competition law prohibits almost any attempt to fix prices.[10]

The Net Book Agreement was a public agreement between UK booksellers from 1900 to 1991 to sell new books only at the recommended retail price, in order to protect the revenues of smaller bookshops. The agreement collapsed in 1991 when the large book chain Dillons began discounting books, followed by rival Waterstones.[15] [16]

Price-fixing cases in the rest of the world

In countries other than the United States, Canada, Australia and within the European Union, price-fixing is not usually illegal and is often practised. When the agreement to control price is sanctioned by a multilateral treaty or is entered by sovereign nations as opposed to individual firms, the cartel may be protected from lawsuits and criminal antitrust prosecution. This explains, for example, why OPEC, the global oil cartel, has not been prosecuted or successfully sued under U.S. antitrust law. International airline tickets have their prices fixed by agreement with the IATA, a practice for which there is a specific exemption in antitrust law.

Under the EU commission's leniency programme whistleblowing firms which co-operate with the anti-trust authority see their prospective penalties either wiped out or reduced.[11]

In October 2005, the Korean company Samsung pleaded guilty to conspiring with other companies, including Infineon and Hynix Semiconductor, to fix the price of dynamic random access memory (DRAM) chips. Samsung was the third company to be charged in connection with the international cartel and was slapped with a $300M fine, the second largest antitrust penalty in US history. In October 2004, four executives from Infineon, a German chip maker, received reduced sentences of 4 to 6 months in federal prison and $250,000 in fines after agreeing to aid the DoJ with their ongoing investigation of the conspiracy.

In 2006, the Government of France fined 13 perfume brands and three vendors for price collusion between 1997 and 2000. The brands include L'Oréal (4.1mil euro), Pacific Creation Perfumes (90,000 euro), Chanel, LVMH's Sephora (9.4mil euro) and Hutchison Whampoa's Marionnaud (12.8mil euro).[17] International price fixing by private entities can be prosecuted under the antitrust laws of many countries. Examples of prosecuted international cartels are those that controlled the prices and output of lysine, citric acid, graphite electrodes, and bulk vitamins. [18]

In 2008 LG Display Co., Chunghwa Picture Tubes and Sharp Corp. have agreed to plead guilty and pay $585 million in criminal fines for conspiring to fix prices of liquid crystal display panels.

Seoul, South Korea-based LG Display will pay $400 million, the second-highest criminal fine the department's antitrust division has ever imposed. Chunghwa will pay $65 million for conspiring with LG Display and other unnamed companies and Sharp will pay $120 million, according to the Justice Department. [19]

See also

Footnotes

  1. ^ US CODE: Title 15,1. Trusts, etc., in restraint of trade illegal; penalty
  2. ^ Antitrust Law Developments (2002); United States v. Socony-Vacuum Oil Co., 310 US 150 (1940) [1]
  3. ^ The Antitrust Laws A Primer (1993); Art Publishers Association, Bulletin: Be Careful About Antitrust Law (Feb. 2000). [2]
  4. ^ Antitrust Law Developments (2002); Art Publishers Association, Bulletin: Be Careful About Antitrust Law (Feb. 2000). [3]
  5. ^ Art Publishers Association, Bulletin: Be Careful About Antitrust Law (Feb. 2000). [4]
  6. ^ The Antitrust Laws A Primer (1993); Antitrust Outline Northwestern University [5]
  7. ^ Antitrust Enforcement [6]; National Association of Attorneys General Antitrust Project [7]; Art Publishers Association, Bulletin: Be Careful About Antitrust Law (Feb. 2000). [8]
  8. ^ The Informant, by award-winning author and former New York Times writer, Kurt Eichenwald, and Rats in the Grain, by Ivy League lawyer, James B. Lieber. [9] [10] [11] [12] [13] [14] The ADM case was prosecuted in the USA but involved an international conspiracy.
  9. ^ Regulation Magazine Vol. 12 No. 2
  10. ^ Price fixing, cartels and monopolies | Business Link
  11. ^ "Heineken and Grolsch fined for price-fixing", The Guardian. Retrieved on 1 August 2007.

External links

This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)

Dansk (Danish)
n. - prisregulering

Français (French)
n. - alignement des prix

Deutsch (German)
n. - Preisabsprache

Ελληνική (Greek)
n. - συμφωνία ανταγωνιστών να πωλούν σε συγκεκριμένες τιμές

Italiano (Italian)
accordo di cartello

Português (Portuguese)
n. - sustentação de preços (f)

Русский (Russian)
незаконное ценообразование

Español (Spanish)
n. - fijación de precios

Svenska (Swedish)
n. - prisstopp, (agreement) prisöverenskommelse mellan konkurrenter

中文（简体） (Chinese (Simplified))
价格垄断, 操纵物价, 价格管制, 物价控制

中文（繁體） (Chinese (Traditional))
n. - 價格壟斷, 操縱物價, 價格管制, 物價控制

한국어 (Korean)
n. - (정부나 업자의) 가격조작

日本語 (Japanese)
n. - 価格操作

עברית (Hebrew)
n. - ‮קביעת מחיר (אחיד)‬

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