The Ethical Issues of Price Fixing

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"Cash is king" is the business world's mantra. In a capitalist society, any means necessary to earn the greatest amount of money is not only encouraged, but often celebrated. One method businesses currently employ to bolster their bottom line is price-fixing or cooperating with competing merchants to set prices on goods and services. If everyone can stick to the agreed-upon price, everyone earns money in theory, and the price of that item or service never wavers below a certain rate. This effectively allows these merchants to determine the market for everyone, by controlling supply and demand. But while price-fixing offers businesses a way to make greater profits in the short term, it also has its long-term downsides, legally, ethically and financially.

The main attraction for most businesses is that price fixing allows them to, in effect, manipulate the market to serve their own needs. Market share can be increased, business owners can attract more customers (since they're not able to get a better deal elsewhere), and hopefully, continue to sell to these customers over time. This allows businesses to grow faster, and more profitably. Secondly, price-fixing allows businesses to know, at least in part, what their competitors are doing. Since everyone has agreed to do the same thing in terms of their pricing models, it levels the field among the larger players in each market and permits them access to some of their competitors' secrets. Therefore, self-interest is the driving force behind price-fixing.

But over the long-term, price-fixing can backfire, for several reasons. According to a recent article in the Houston Chronicle, "… operating just to pursue the company's self-interest can result in decreased trust by customers and lawsuits that take up company time and money to defend." Price fixing is currently illegal in the United States, Canada, Australia, New Zealand, the United Kingdom, and other countries throughout the world (Cornell). In order to protect the consumer, in the United States, the U.S. Department of Justice and the Federal Trade Commission are both empowered to bring suits in antitrust cases as a criminal federal offense under section 1 of the Sherman Antitrust Act. Since 1997, courts have further defined the law to include vertical (controlling a retail product's price between two or more unequal businesses that are not direct competitors) and horizontal price-fixing (controlling a product's price among direct competitors at the same level). Though vertical price-fixing is no longer considered a violation of the Sherman Antitrust Act, it can still lead to expensive lawsuits that create an unfavorable view of a business' practices in the marketplace.

Secondly, price-fixing creates ethical issues for a company, through price discrimination. Price discrimination occurs when businesses charge different customers different prices for the same goods and/or services. Though it's common for a business to offer a lower price to a new customer, for example, or for a restaurant to charge less for a children's meal, "price discrimination is illegal unless the price differential has a basis in actual cost differences in selling products to one customer relative to another" (Ferrell & Hartline 255-256). The Robinson-Patman and the Clayton Antitrust Acts both regulate fair pricing, in order to ensure that all competitors are permitted the same or similar opportunities. So, a business doesn’t just have to violate the Sherman Antitrust Act to be prosecuted for price-fixing.

Lastly, price-fixing comes with a distinct financial cost. The lawsuits can be costly to fight in court, especially if they drag out over an extended period and require the services of one or more attorneys. This can also create shareholder dissent within a company, and even restrict a business' ability to raise or borrow additional funds for expansion over time.

Additionally, businesses may lose customers because they are perceived as greedy or price gouging (if selling something greatly needed in an emergency, for example), or has set their prices in a predatory way. Since many businesses can only operate because of customer lifetime value (CLV), it's always best to cultivate honest, above-board relationships that promote customer retention. Long-term projections of future earnings, as well as quarterly sales, depending on a business' ability to handle this gracefully and ethically.

In examining all the aspects of price-fixing, it must be concluded that it is indeed bad for business. Legally, a business puts itself in great jeopardy by engaging in price-fixing, since it's illegal in the United States, and many other countries worldwide. If convicted, violators can pay heavy fines, and even serve prison sentences. Ethically, the short-term gains from price-fixing through price discrimination creates additional stress, by labeling s business as greedy or deceptive. Finally, financial profit from price-fixing can often be wiped out by long-term customer dissent and defection, by possible heavy fines, and a diminished perception of the product or brand. Taken together, these aspects show that price-fixing is usually not good for a company's bottom line.

Works Cited

"15 U.S. Code § 1 - Trusts, Etc., in Restraint of Trade Illegal; Penalty." LII / Legal Information Institute. Cornell University Law School, n.d.

Ferrell, O.C., and Michael Hartline. Marketing Strategy. 5th ed. Cengage Learning, 2012.

Nielsen, Lisa. "Ethical Pricing Strategy." Houston Chronicle, n.d.