Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.
The intent of price fixing may be to push the price of a product as high as possible, generally leading to profits for all sellers but may also have the goal to fix, peg, discount, or stabilize prices. The defining characteristic of price fixing is any agreement regarding price, whether expressed or implied.
Price fixing requires a conspiracy between sellers or buyers. The purpose is to coordinate pricing for mutual benefit of the traders. For example, manufacturers and retailers may conspire to sell at a common "retail" price; set a common minimum sales price, where sellers agree not to discount the sales price below the agreed-to minimum price; buy the product from a supplier at a specified maximum price; adhere to a price book or list price; engage in cooperative price advertising; standardize financial credit terms offered to purchasers; use uniform trade-in allowances; limit discounts; discontinue a free service or fix the price of one component of an overall service; adhere uniformly to previously-announced prices and terms of sale; establish uniform costs and markups; impose mandatory surcharges; purposefully reduce output or sales in order to charge higher prices; or purposefully share or pool markets, territories, or customers.
Price fixing is permitted in some markets but not others; where allowed, it is often known as resale price maintenance or retail price maintenance.
In neo-classical economics, price fixing is inefficient. The anti-competitive agreement by producers to fix prices above the market price transfers some of the consumer surplus to those producers and also results in a deadweight loss.
International price fixing by private entities can be prosecuted under the antitrust laws of many countries. Examples of prosecuted international cartels are those that controlled the prices and output of lysine, citric acid, graphite electrodes, and bulk vitamins.
In 1990, the USA Justice Department was investigating an incidence of covert price fixing in the airline industry. It seemed that certain airlines may signal fare increases to each other through the computer network of the industry's clearing house for fares. Through a process of hidden electronic negotiation, this would allow participating carriers to adjust their prices in concert so that the consumer had little chance of receiving competitive prices from different airlines for the same leg.
Price rigging is one of the principal ways in which foreign firms are excluded from Japan. This is supported by the preferential buying habits of Japan's many keiretsu families of companies, which are linked by a web of cross-shareholdings that can set the margins all the way from the factory to the shopkeeper's shelf and keep Japanese prices as much as 60% higher in Japan than in America.
In 1994 the European Union fined 16 European steelmakers a total of $117 million for flagrant violation of rules on price fixing and share markets for steel beams.
Price fixing is just another way of using futures markets. The dealer may agree to buy a certain quantity of a commodity of a specified quality at a given date, the price to be based on a futures market quotation (plus or minus an agreed amount) for a specified delivery contract at a date chosen by the buyer within a fixed period.