It hurts consumers because they have to pay higher prices than when the market is operating competitively. Horizontal price-fixing is terrible for consumers because it reduces the consumer surplus. Less competition makes prices higher than when under competition.
The market operates inefficiently and transfers some of the consumer surpluses to the producers. In a competitive market, the consumer surplus is relatively high. Intense competition forces companies to operate more efficiently to offer lower prices. However, when firms engage in price-fixing agreements, the intensity of competition decreases.
Consumers must pay a higher price than if price adjustment does not exist. That way, they can keep prices high without losing customers. A sufficiently broad agreement can allow them to act like a monopolist. When successful, they might expand the deal, not only on price but also on production and other non-price aspects. Collusion occurs when firms in the market cooperate with each other secretly to influence market profits. Examples of collusive practices include price-fixing, prior notification of price changes, and exchange of information.
Such practices are illegal because they inhibit competition and harm consumers. Price fixing interferes with the free market mechanism. It is an example of the practice of unfair competition and giving companies, collectively, higher market power. They can increase profits at the expense of consumers. Firms can charge a higher price than when the market is operating in competition.
Also, lowering the intensity of competition reduces the incentive to innovate and increases barriers to entry. Several horizontal price-fixing collaborations are taking place in secret. Emerging Markets. Company Profiles. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. What Is Fixing? Key Takeaways Fixing is the practice of setting the price of a product rather than allowing it to be determined by free-market forces.
Fixing is illegal when it involves collusion among two or more producers of a product or service to maintain artificially high prices or keep the prices they pay their suppliers artificially low. According to the FTC, illegal price-fixing is a written, verbal, or inferred agreement among competitors that "raises, lowers, or stabilizes prices or competitive terms.
Article Sources. Investopedia requires writers to use primary sources to support their work. Buyers with large purchasing power could also force better terms and break price fixing agreements. John M. Accessed Nov. Library of Congress. Miles Medical Co. Department of Justice.
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