Price fixing is a practice in which the prices for goods and services are manipulated in a way which is designed to benefit specific companies or individuals. In a simple example of price fixing, two rival gas stations could meet and decide to offer their gas at the same price, creating an artificially high price for gasoline which consumers would be forced to pay through lack of choice. Usually, this practice is illegal, and in some nations, it comes with severe legal consequences.
When people discuss price fixing, they usually talk about corporate price fixing, in which two or more companies collude to manipulate prices. This practice can also involve individual players in the market which is being manipulated. People regard this practice as unfair because it allows companies to dictate the prices for goods and services, rather than allowing prices to fluctuate as the free market influences them. Governments may also become involved in price fixing.
If two companies happen to sell competing products at the same price, it is only considered price fixing if collusion can be proved. In other words, if two supermarkets both sell packs of a dozen eggs at the same cost, this would not be illegal. If, however, someone could prove that the owners of the supermarkets held a secret meeting in which they decided to sell their eggs at the same price, it would be considered price fixing.
Often, price fixing results in price gouging. In a free market where businesses adjust prices to meet supply and demand needs, prices can fluctuate a great deal, but they are generally considered fair. When people collude, they usually elevate prices significantly, creating a price discrimination situation in which prices rise well above a level which would be considered acceptable. Many people believe that this practice hurts the economy as a whole, which is one of the reasons it is frowned upon.
In a related concept, bid rigging, contractors collude together when offering sealed bids. The sealed bidding process is designed to generate a pool of competitive bids for a contract like supplying food to the troops or building a government building. When the contractors hold a secret meeting to determine which bid should be accepted and then submit bids in a way which promotes a particular contractor’s bid, this is bid rigging. Bid rigging can be accomplished by pulling out of the bidding pool at the last minute, offering a bid which is way over-priced, or attaching unfavorable terms to a bid. These practices create the illusion of a diverse pool of bids to choose from, but they inevitably lead to a single contractor’s bid as the obvious choice, thereby eliminating the competitive aspect of the process.