Price Fixing

Price fixing is an agreement (written, verbal, or inferred from conduct) among competitors to raise,
lower, maintain, or stabilize prices or price levels. Generally, the antitrust laws require that each
company establish prices and other competitive terms on its own, without agreeing with a competitor.
When purchasers make choices about what products and services to buy, they expect that the price
has been determined on the basis of supply and demand, not by an agreement among competitors.
When competitors agree to restrict competition, the result is often higher prices. Price fixing also
includes agreements among competing purchasers or competing employers about the prices or
wages they will pay. Price fixing is a major concern of government antitrust enforcement. Individuals

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and companies that knowingly enter price-fixing agreements are routinely investigated by the FBI and
other federal law enforcement agencies and can be criminally prosecuted. Potential penalties include
lengthy terms of imprisonment (up to ten years) and large fines (up to $1 million for individuals, $100
million for companies, or twice the gain or loss from the offense). Where appropriate, the FTC may
also bring a civil enforcement action.

A naked agreement among competitors to fix prices is almost always illegal, whether prices are
specified at a minimum, maximum, or within some range. Illegal price fixing occurs whenever two or
more competitors agree to take actions to raise, lower, maintain, or stabilize the price of any product
or service. Price-fixing schemes are often worked out in secret and can be hard to uncover, but an
agreement can be discovered from "circumstantial" evidence. For example, if direct competitors have
a pattern of unexplained identical contract terms or price behavior together with other factors (such
as the lack of legitimate, independent business explanation), unlawful price fixing may be the reason.
Invitations to coordinate prices also can raise concerns, as when one competitor announces publicly
that it is willing to end a price war or raise prices if its rival is willing to do the same.

Not all price similarities, or price changes that occur at the same time, are the result of agreements
among competitors. 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 paid to all affected farmers will likely
increase. An increase in consumer demand can also cause uniformly higher prices for a product in
limited supply.

Price fixing relates not only to prices, but also to other terms that affect prices to purchasers, such as
credit terms, shipping fees, warranties, discount programs, or financing rates. Antitrust scrutiny may
occur when competitors discuss the following topics:

Present or future prices

Pricing policies

Promotions

Bids

Costs

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Capacity

Terms or conditions of sale, including credit terms

Discounts

Identity of customers

Allocation of customers or sales areas

Production quotas

R&D plans

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 purchasers, 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.

An agreement to restrict production, sales, or output is just as illegal as direct price fixing, because
reducing the supply of a product or service drives up its price. For example, the FTC challenged an
agreement among competing oil importers to restrict the supply of lubricants by refusing to import or
sell those products in Puerto Rico. The competitors were seeking to pressure the legislature to repeal
an environmental deposit fee on lubricants, and warned of lubricant shortages and higher prices. The
FTC alleged that the conspiracy was an unlawful horizontal agreement to restrict output that was
inherently likely to harm competition and that had no countervailing efficiencies that would benefit
consumers.

Q: The gasoline stations in my area have increased their prices the same amount and at the same
time. Is that price fixing?

A: A uniform, simultaneous price change could be the result of price fixing, but it could also be the

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result of independent business responses to the same market conditions. For example, if conditions in
the international oil market cause an increase in the price of crude oil, this could lead to an increase in
the wholesale price of gasoline. Local gasoline stations may respond to higher wholesale gasoline
prices by increasing their prices to cover these higher costs. Other market forces, such as publicly
posting current prices (as is common with most gasoline stations), encourages suppliers to adjust
their own prices quickly in order not to lose sales. If there is evidence that the gasoline station
operators talked to each other about increasing prices and agreed on a common pricing plan,
however, that may be an antitrust violation.

Q: Our company monitors competitors' ads, and we sometimes offer to match special discounts or
sales incentives for consumers. Is this a problem?

A: No. Matching competitors' pricing may be good business, and occurs often in highly competitive
markets. Each company is free to set its own prices, and it may charge the same price as its
competitors as long as the decision was not based on any agreement or coordination with a
competitor.

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