how does price fixing work, can’t anyone charge whatever they want for a product?


how does price fixing work, can’t anyone charge whatever they want for a product?

In: 82

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.