how does price fixing work, can’t anyone charge whatever they want for a product?
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The short answer is no, businesses can’t collude to charge whatever they want. They can each charge whatever they want, but can’t collectively come up with a price that they all charge.
This law exists to protect people from exploitative businesses practices. There are many similar laws (e.g. anti-trust, false advertising, safety labelling, banning dangerous products, etc.)
Typically the number of large producers or sellers is quite small so it’s easy to come to an agreed price range with or without direct communication. There’s a bit of psychology at play. So for instance with a societal perception that things are though due to some global shortage the five companies producing something can all increase their price range without too much alarm while also typically decreasing the size. A thing to note is that a global shortage doesn’t actually have to exist, just the perception is needed. There’s a base reality but optics plays a massive role in nearly everything humans do.
You are free to charge whatever you want unless it’s an emergency and you’re selling essentials. If customers don’t like it they can go to another store. If you’re a seller, it’s illegal for you to call up other stores and collude with them to artificially raise the price.
In theory, in a pure competitive market, producers will compete between each others until prices have converged to costs, destroying any margin. This is especially true for commodity products without any differentiation.
It’s fun for consumers, but producers don’t want that. So they decide that “sharing” the market between themselves with a “good enough” market share is worth it if it prevents a price war.
“I won’t lower price if you don’t lower yours” is bad for consumers.
It’s illegal for them to just rent a room and discuss pricing strategy, but there’s a lot of more indirect ways to do it:
– don’t compete on a tender in someone’s area
– ruthlessly undercut anyone who dares try in your area
-> after a while competitors get the message and implicitly share the market between themselves
So there are three guys seeling oranges and two of them make a non-official deal saying they’ll both sell at a very low price. The third guy can’t go that low and is forced out of the market.
Now these two guys can start selling at a high price again, they just got the customers of the third guy so they’re gonna make more money.
What these two guys did wasn’t very fair and the market is supposed to be fair so price fixing like that is illegal.
To make it really ELI5:
Two companies make and sell donuts.
One company makes the donut for 5 dollars, and sells them for 10.
The other company makes them for 8 dollars but since the first company sells their donuts for 10, the second company can’t charge more because people will just buy donuts from the first company cheaper.
So in order to make more money the second and first companies meet and discuss, they decide to both up the price of donuts to 15 dollars each so no matter which company the customers go to, they’ll both earn more money per donut sold and they don’t risk losing customers to the other company.
The reason this is illegal is because the market is meant to have businesses compete for customers so that instead of higher prices, in my example, the first company could go down to selling donuts for 7 dollars each and still make some profit, and the second company just wouldn’t be able to stay in business because it costs them more just to make the donut than the first company is selling theirs for.
This model applied to a whole market usually means that quality suffers a bit from cut corners, but the customers end up with the cheapest possible products and the businesses who fail are meant to fail so that us consumers can get more for the money we earn.
There is a LOT more complexity to price fixing, profit, and production, but this example shows you clearly how price fixing hurts the consumer a lot. So it is consumer protection that is the basis of anti-pricefixing laws.
If the market has only a few sellers of a product they can come together and decide to increase the price of their product. This works for as long as the sellers act on their convetion. For example there are only three orange farmers on the market. They are in competition and they try to outbid each other so they sell oranges with a very low profit margin at $1/orange. One day they come together and decide that they all should be asking $2/orange. They are now making much more profit. Of course, any one of them can break the deal and sell lower. But then the other two would do the same and they will be back at asking $1/orange. So there is a big incentive to keep the deal.
The assumption is that a company will sell at a lower price to increase sales; that when a company wants to “beat” its competitors it will want to sell at a lower price. The hopeful idea here, is that the fairest (lowest) price is subsequently set by *all companies* selling the certain product, as ‘natural forces’ of ‘competition’ drive them each lower to match these competitors.
The reality is that the companies are all incentivized to sell at the highest price possible, to maximize profit-per-effort.
Price fixing is when companies specifically collude, and agree that they won’t go lower on their prices. This increases the profit per effort for all involved.
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You ask, Can’t a company sell at what price it wants? Yes it can! But that price will be *as high* as it can charge, not *as low*, as I think you’re curious about. The upper limit is about where customers just stop purchasing the product. If just enough customers agree to the price, it’s not too high from the seller’s perspective.
So, if two major companies are already selling high at fixed prices, then a third new entrant has no need or desire to go low, except perhaps to get their name out there.
In fact, prices can be artificially high without specific collusion, as companies observe each other’s habits. This is especially true when there is brand loyalty. If “inferior brand” that I don’t like is selling for $X, then I don’t mind paying $X+Y for “my brand”. (Back and forth among competitors to the highest limit.)
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In the real world, if a small new player enters a market and tries to low-ball on their prices, the established players with high prices will generally just buy that company, or perform other tactics to bully them out of the market, or keep them pinned in a metaphorical corner, if they can. At this point, many major corporations have vertical near-monopolies, so in reality, with many markets, the established competitors have sway with the pricing and availability of materials for any new competitors.
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So, others are stopping their assessments early, by interrupting themselves with what the laws are supposed to do. But in fact, price fixing has to be fairly blatant before it can even be called such.
Supply exists, and demand exists, but Supply-and-Demand as a natural device that *definitively* counters price fixing/gouging/scalping has yet to really be seen. Which I mention, because it seems to be the backdrop to your question.
They basically can, look at the “free market” pharmaceutical industry in the United States. Capital = power. The farce that rising consumer prices are due to this amorphous concept of “inflation” is absolutely fantastic rhetoric in the eyes of executives of companies that sell these products. It allows them to finger point and make it seem like they’re in a tough spot too, when in reality it is to continue the trend of rising profit margins. The accounting equation must balance and if a variable of revenue like profit margin increases, something on the other side of the equation must match that. Aka rising consumer costs.
When an entire industry is controlled by two or three corporations, their CEO’s might play a round of golf under false names.
If they all agree to raise their prices 9%, the customers can’t go anywhere else to get that product.
In a capitalist economy, it should be easy for just about anyone to start a business and compete with a big corporation by charging a lower price. A small company won’t lease a corporate jet or limo’s for the executives, so…they can afford to charge less.
Open competition is suppost to be part of the “invisible hand” of the market. When there is no competition, it devolves into a monopoly.
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