how does price fixing work, can’t anyone charge whatever they want for a product?
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If you price it high they’ll buy from others and you won’t be able to sell.
if all of them make a group and agree to price it high, the law will not let them do that.
So even if they come to an agreement to overcharge for a product, somebody will eventually break the agreement. Because by charging a little less they gain market share. Whoever is 2nd or 3rd place would not be content with #1 raking in more money merely because they all refuse to lower prices. Furthermore, often a new player will enter the market (because they realize they can undercut their competition) and that will break the cartel.
Do you see why a monopoly is bad? If a company has the monopoly on one ressource, they can charge pretty much anything they want and drop the quality of their product as much as they want. And while they might lose customers that don’t need the product, a monopoly on a product that is needed by peoples is devastating to the society. That’s why there are some anti-monopoly laws.
Laws against price fixing come from the same idea. “Price fixing” is just multiple companies agreeing to have a “monopoly” together. They agree to have the same price (for the same quality of goods), synchronising raises and discounts, so that the customers can never get a better deal elsewhere. Alternatively, they can split the market and have agreements along the lines of “You get all the customers in your big shop in city A while I put overpriced stuff in my small shop, and in exchange you overprice your stuff in your small shop in city B so that I get all the customer in my big shop. So in appearance we’re competing with each other but in reality it’s all part of a plan to make the customer think they get a discount while coming to our big shops while in reality it’s the small shops that are artificially overpriced.”.
Basically, in a perfect market, prices regulate themselves because of something we mockingly call “the invisible hand”
Say you have company A selling phones for $100. Then you have company B trying to sell a similar phone for $500.
Yes, technically company B can sell for $500, $700, $1.6 billion per phone. The price is theirs to choose. But all else being the same, people are just going to buy from company A, because it’s cheaper. So assuming no foul play, prices are gonna float in and around $100.
Price fixing is when companies A, B, C, all the way to Z, all come together, and agree “let’s all sell at $500.” Since everyone needs a phone, they have no choice but to buy from these companies, and have to shell out $500 dollars, for a computer that is worth much less than that.
It is illegal, because it is very much anti-consumer. It’s very similar to why we don’t like monopolies.
As an individual business, you are free to charge whatever you want. If you charge a price that is too high, then you won’t get any customers but if you charge a price that is too low, then you won’t make any money. The tension between these two requirements is called “competitive tension” and it keeps prices reasonable in a market where there are many providers of the product, and the providers are kept honest.
Price fixing refers to when you get together with other businesses selling the same product as you are and collectively decide on what the price should be. This price will of course be higher than what the companies would other wise choose (termed “artificially high”). This mostly happens when there are just a few companies that provide that product, since price fixing only really works if all (or most) providers are in on it (and it would be tricky to agree together between lots of different providers).
If all the companies that provide the product have agreed on the price, then customers wont have an option to take their business elsewhere if they don’t like the price. The customer’s only choice then is whether or not to buy the product at all. This is a major problem in markets for products which are necessities, because customers don’t have the option of not buying the product. This is when governments should get involved and make it illegal for companies to discuss and agree on the price they’re charging.
Price fixing is when separate companies all agree to artificially inflate prices instead of competing.
Say there were 3 gas stations in town, and the owners agreed to keep gas level at $5/gal even when the price they pay for gas falls from $4.50/gal to only $3.50/gal. If the normal mark-up is about 50 cents a gallon, their agreement nets them an extra $1/gal. Price fixing works on goods that have inelastic demand — people need gas to get to work, drive kids to school, etc. no matter the cost. It also works most effectively with commodity goods — a turkey sandwich from Subway is very different from one at the French cafe.
1. fixed price > market price: flood of poor quality products. It gives opportunity to sell poor quality products for profit not available in free market condition, e.g. gun buyback program in US allowed profit from production of (at most) single use, dangerous, untested weapons from 3d printers. Also junk considered as weapon could be turned into profit.
2. fixed price < market price: black market is created. People/companies not willing to risk black market transactions loose. Basically it’s like an extra tax for them. Works best when fighting monopolies, so when there are very few companies offering ‘overpriced’ product. Shortages of ‘overpriced’ product benefits those who are either privileged to get it in legal way or those who can access black market without legal risks.
3. fixed price == market price: no effect.
The Diamond market is a PRIME example of price fixing and how it’s worked for 100+ years (so far). The oil industry is another example (OPEC), followed by most gas stations (I suspect even so-called competing stations communicate to some degree on price within a 1 or 2 block radius)
Outside of conglomerates where price fixing is a thing and does work, for the VAST majority of business, big and small, it doesn’t work so well.
For starters, it’s illegal, but for more established industries (oil and diamonds), it’s been made legal “for them” through sponsorships, political handouts and backdoor payments to keep it legal…for them. Secondly, most people won’t come together to fix a price and agree on similar terms. Most entrepreneurs are competitive and want more of the pie for themselves, so naturally they’ll compete to lower their prices and/or improve the quality of their product or service. Our egos won’t allow us to fix price with a competitor for the benefit of both parties, since typically only one party wants to dominate.
To put in simply, there is a government regulated body which decides how much margin of profit can be charged to a certain product which is to be sold in the country, even if you are the single producer of that product.
The issue here would be the same as if we allowed monopolies to form.
When we have companies fighting against each other to get customers, they will find ways to improve quality or reduce the price. This way, they will stand out from the competition by having better products or better prices.
Now, imagine a scenario where only 1 company can make a product, this is a monopoly. They will have no incentive to give good prices or to increase qualtity. They have the market and they can increase price at no expense. They also can reduce quality at no expense. There will not be any othet player that will come and take their customers.
Now, if we have multiple companies that offer a product, we know that there isn’t a monopoly. However, if the companies come together to fix the price, they will be setting the price like if they were a monopoly. Meaning they can rise prices as much as makes them most profit and they will never get incentive to reduce them.
The reasons why we have laws against monopolies and against price fixing are very similar on an economic level. In the end, companies that compete against one another will have to make consessions at the expense of their profits, and consumers will gain from lower prices or better quality. Where as companies not competing against one another will not make concessions, this will be at the expense of the customers.
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