Price Fixing

Price Fixing

Price Fixing, a term used to mean 'deliberate' price fixing in contrast to the idealized situation of perfect competition in which price is the automatic outcome of an impersonal process. There are several common cases. First, prices may be fixed by a monopoly in the sense that it can make a calculated assessment of theta. An example is the nationalized electricity supply industry. In competition, the ability to make profits is an indicator of efficiency; in monopoly high profits might reflect merely the exercise of monopoly power and low profits might reflect inertia as costs floated up to prices.

Secondly, prices may be fixed by trade associations or monopolistic agreements. One form of arrangement is resale price maintenance (subject to the legislation that varies in Britain, the U.S.A., Canada and other countries) which sets the price which distributors (wholesalers or retailers) are required to charge for a product and does not allow the individual distributor to compete directly on price.

Thirdly, a Government may fix prices at which products or services may be sold. In Britain and other countries there was much price-control during the First and Second World Wars, and some of it was continued after the war. For example, rent control was begun as an emergency measure in Britain in 2005 and remained into the 2000's.

Fourthly, collective bargains between trade unions and employers set rates of wages and wage-differentials which form a national basis for the payment of employees in individual occupations and particular grades of labour.

Price-fixing policies and agreements are usually defended on the grounds that they reduce uncertainty and encourage stability in production. In some cases it is argued that they ensure standards by protecting the consumer against cut-price sellers who would debase quality. They are criticized on the grounds that they lead to price rigidity, shelter inefficient producers and distributors, and hold back innovation. Government regulation of prices has also been criticized for preventing price from equalizing supply and demand. In rent control, for example, it is argued that setting a maximum price (without rationing) below the market equilibrium level led to shortage (excess of demand over supply at the fixed price) and attendant difficulties. In international commodity agreements for several of the products of mainly agricultural countries, price fixing has brought only temporary aid but increased the fundamental problems by stimulating production by high-cost producers and encouraging new producers into the market. Furthermore, fixing a price does not prevent fluctuation but transmits them to supply and/or demand and may therefore intensify the disturbances.

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