Why does price fixing happen

Consumers Home Business Home. A key element of competition is price. It is essential that businesses set their prices independently. Price fixing is a serious form of anti-competitive behaviour that happens when two or more suppliers of a product or service come together and agree on pricing. Price fixing agreements do not need to be in writing or even to have been carried out; they are still against the law, simply making a cartel agreement is illegal.

Change Cookie Settings. Price fixing agreements can take many forms. As well as agreeing to charge the same price, members of a price fixing cartel may also illegally agree on discounts, margins, price differentials, price increases or minimum prices. Before we discuss the factors that create a price-fixing-prone industry and organization, we would like to point out that the various problematic situations that contributed to this unhappy end are certainly not unique to the paper industry.

Many economists would consider the folding-carton industry to be one of the least likely to spawn a price-fixing conspiracy. With this number of companies, one would think that the rivalry among them would be so intense that it would preclude any mutual understandings and tacit agreements. The market was, simply, badly crowded. Other pressures toward collusion were the job-order nature of the business and the fact that the products were undifferentiated.

With low barriers to entry, competitors of all sizes saw this area as a great opportunity. Traditionally dominated by small family-run box-making shops, the industry became attractive to very large forest products companies, which integrated forward. These large companies first supplied the paperboard for box making, and then began to compete with their customers further down the line in making the actual boxes themselves.

The tendency toward overcapacity in paperboard production tempted these large paper companies to look on folding boxes as a way to unload excesses.

Also harmful to the market in the intervening years was the halt of supermarket expansion as well as the growth of the use of substitute containers, such as plastics, which eroded the market share for paper containers. The industry is now very mature and has even suffered revenue as well as profit declines. These declines place great pressure on middle level managers who are keenly aware that the constant use of existing capital equipment is the way to drive down unit costs.

One general manager commented:. We could have brought on more sophisticated equipment and been more efficient in the use of labor and style of production. Too much was invested in the paperboard mills and nothing in folding-carton plants. Financial analysts look at these past bad investments and the bad earnings here and refuse to look on this industry with a favorable eye.

Some say a shakeout is long overdue; others complain about vicious customers. Some managers in folding-box companies complain of the predatory influence of the large companies they supply. One division manager stated:. Anything this industry has done has been more in defense than offense.

Business is really dwindling, and we are even more dependent on pleasing the big customers we depend on. They will destroy you. No one here is making much in this industry anymore. Now the pressures are not to make more money but to keep from going under. Price discussions between competitors are important just to keep from going broke. Our customers should be investigated instead. In the electrical contractors case the issue was also survival. A convicted General Electric division vice president explained:.

In the folding-box industry cost-cutting practices are also hampered by the nature of the production process. Boxes are generally manufactured for short job orders. One general manager said:. No two boxes are the same for us.

Even with soap boxes, there are diverse product specifications. Each of these jobs is costed and priced individually. Since each order is custom made, the pricing decisions are made frequently and at low levels of the organization. One salesman illustrated how a job-order business exposes a company to low-level price collusion:. Dialogue on prices is always on your mind.

I think our company has been stupidly naive. It is impossible not to have talked price at some time. Finally, while job specifications vary greatly between orders, the skills and equipment are fairly undifferentiated between companies. Several executives we interviewed concur with the following statement from one vice president:. The only way to get a buyer is to sell at a lower price.

Thus competitors may think that the only way to make it is to get together and fix prices. With such factors as a crowded and mature market, declining demand, difficulty in cutting costs, and no company product differentiation, it is not surprising that profits have been bad. Several companies have folding-carton divisions that have not seen a real profit in years.

Just in the period of time in which we conducted this research, three large box makers announced they were either selling out or closing up. We heard one convicted executive explain in a quivering voice:. It was presumably done for the betterment of the company. It seems that the recognition of common goals can be shared within a large group of diverse competitors as well as within a close-knit oligopoly.

Certainly not all industries face such adverse conditions. But many other industries face some combination of these circumstances, and management complacency in the face of these conditions could be very costly. Our interviews clearly reveal that not all the factors contributing to price fixing come from the industry, economic, and technical factors we have considered. Some come directly from the companies themselves and the subculture of the industry; some are built into personnel pricing, sales, and legal staff practices.

In the electrical contractors conspiracy, there were strong pressures to enforce the anticompetitive norms. Executives in the paper industry point out that people in the folding-carton business are not necessarily evil but are just people who have worked in a system with a history of very different ground rules.

A convicted executive claimed that price fixing was common practice in his business:. Our ethics were not out of line with what was being done in this company and, in fact, in this industry for a long time. Another factor encouraging price fixing arises when a company with one culture acquires another with a quite different one. In several companies convicted of price fixing, senior executives acknowledge that rapid vertical integration brought their forest products companies into secondary converting businesses, which were little and poorly integrated.

The 15 individual plants were poorly coordinated and poorly managed. We just came along with our acquisition drive and then sent top management attention elsewhere. The parent companies often naively assumed that business practice and ethics in the two companies would automatically be congruent even if there were no common heritage. As an illustration of the sort of side practices that may come with a business acquisition, the management of one large forest products company learned to its shock that the boxmaking company it had just acquired had been running a house of prostitution as a customer service for years.

One vice president stated:. That is just not the way we do business. Questions of ethics were never raised. We assumed that people do business ethically at our company. Apparently that was a simple-minded assumption. On top of any other influences, the personnel practices used in many companies seemed actually to encourage people to engage in price fixing. A division manager spelled out these practices:. People have been evaluated on the basis of profit and how forcefully they can execute a price increase.

If it is known that the operating chief of your area wants business conducted in a certain way, it seems that is what really counts.

There is a certain amount of looseness to a new set of rules. He may accept questionable practices feeling that he may just not know the system. There are no specific procedures for him to follow other than what other salesmen tell him. At the same time, he is in an industry where the acceptance for his product and the level of profitability are clearly dropping. Library of Congress. Miles Medical Co.

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Develop and improve products. List of Partners vendors. By Kimberly Amadeo. Learn about our editorial policies. On the contrary, they often result from normal market conditions. For example, prices of commodities such as wheat are often identical because the products are virtually identical, and the prices that farmers charge all rise and fall together without any agreement among them. If a drought causes the supply of wheat to decline, the price to all affected farmers will increase.

An increase in consumer demand can also cause uniformly high prices for a product in limited supply. Price fixing relates not only to prices, but also to other terms that affect prices to consumers, such as shipping fees, warranties, discount programs, or financing rates. Antitrust scrutiny may occur when competitors discuss the following topics:. A defendant is allowed to argue that there was no agreement, but if the government or a private party proves a plain price-fixing agreement, there is no defense to it.

Defendants may not justify their behavior by arguing that the prices were reasonable to consumers, were necessary to avoid cut-throat competition, or stimulated competition.

Example: A group of competing optometrists agreed not to participate in a vision care network unless the network raised reimbursement rates for patients covered by its plan. The optometrists refused to treat patients covered by the network plan, and, eventually, the company raised reimbursement rates.

The FTC said that the optometrists' agreement was illegal price fixing , and that its leaders had organized an effort to make sure other optometrists knew about and complied with the agreement.