Price fixing refers to an agreement between market participants to collectively raise, lower, or stabilize prizes to control supply and demand. The practice benefits the individuals or firms involved in setting the price and hurts consumers and firms on the receiving end.
Why is Price Fixing Illegal?
Under Canadian and United States competition laws, price fixing is illegal. The practice is deemed anti-competitive and ultimately hurts consumers and businesses. Price fixing provides firms with the ability to deter away from market competition. It is easier and more profitable for producers to collude and set prices together rather than compete in a competitive environment. It puts less pressure on firms to keep prices competitive and victimizes customers.
It is important to note that it is not illegal for firms to offer the same price. The legality issue only comes into play when these firms enter into an agreement with each other to set prices.
Example of Price Fixing
In a small town, there are only two gas stations. The two gas stations are engaged in a tough competition with each other, undercutting prices to attract the most customers.
One day, the manager at one of the gas stations decides to schedule a meeting with the manager at the other gas station. He says: “Over the past few months, our profits have declined because we have been decreasing our prices to drive traffic away from each other – why don’t we both agree on a price to charge customers so we can extract more profits from them?”
The other manager agrees, and the gas stations collectively decide to raise prices from $100 to $200. Given no other options, consumers are forced to pump gas at $200.
Horizontal Price Fixing vs. Vertical Price Fixing
Price fixing among marketplace competitors is called horizontal price fixing, whereas fixing prices along the supply chain is called vertical price fixing.
1. Horizontal Price Fixing
This involves an agreement by competitors to set a minimum or maximum price for their products. For example, electronics retail companies may collectively fix the price of televisions by setting a price premium or discount.
2. Vertical Price Fixing
This involves an agreement by members along the supply chain (manufacturers, producers, retailers) to set a minimum or maximum price. For example, manufacturers may collectively agree to set a minimum resale price.
Why is Price Fixing Hard to Prove?
Price fixing is often difficult to prove, as such agreements are made in secret. This is a major concern for governments. Price-fixing discussions typically happen during a private meeting or phone call to prevent a paper trail. Price-fixing agreements are typically uncovered by evidence from insiders or from consumers. Once an investigation into the illegal practice is conducted, the competition bureau can:
Subpoena individuals deemed to be involved in price fixing
The investigative power of the competition bureau is similar to other law enforcement agencies. According to the Canadian Competition Bureau, once caught and prosecuted for price fixing, a company faces fines up to $25 million and imprisonment to a maximum term of fourteen years, or both.
Example: The Canadian Bread Industry
In 2018, Loblaws Companies Ltd., Walmart Canada Corp., Sobeys Inc., Metro Inc., and Giant Tiger Stores Ltd., among others, confessed to being involved in a bread price fixing scheme. The firms allegedly agreed to increase the price of bread by at least $1.5 over the years 2001 and 2015.
Analysts often refer to bread as a loss leader – bread is typically sold at supermarkets at a price lower than its cost, in order to entice consumers to shop at the supermarket and ultimately purchase profit-generating items. The firms worked together to raise the price of bread. The consumer price index for bread, rolls, and buns rose 96% between 2001 and 2015.
The investigation started when Loblaw publicly admitted to its wrongdoing. Loblaw offered a $25 gift card as compensation for its involvement in fixing bread prices. The company captured some positive reactions from consumers as social media buzz shared the arrival of their gift card. The gift card strategy helped shift the narrative in Loblaw’s favor.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep learning and advancing your career, the additional CFI resources below will be useful: